Overseas Share Investments – NZ Tax Implications

Introduction

In recent years, online platforms like Sharesies and Hatch have made it easy for New Zealanders to purchase local and overseas shares, exchange-traded funds (ETFs) and managed funds. These platforms have encouraged investing, making it accessible to everyone regardless of their investment level. However, overseas share investments do have NZ tax implications that investors need to be aware of.

Tax Time: What You Need to Know

Are my dividends taxable in NZ?

If your investments cost under $50,000, you may need to do nothing apart from including dividends in your tax return.

Investments held through Sharesies

Any related income has tax deducted on your behalf and reported directly to the IRD. This makes compliance much easier as the income and tax paid will pre-populate in your income tax return.

Professionally managed portfolios

If you have a professionally managed portfolio through a firm like Craigs or Forsyth Barr (for instance), overseas income will be included in your annual portfolio summary.

Investments that you manage yourself

If you self-manage, you will need to track the income and overseas tax credits for conversion to NZD. This will need to be included in your tax return.

Investments over NZ$50,000

If your overseas shares cost over NZ$50,000, you may need to pay tax under Foreign Investment Fund (FIF) rules. Shares in Australian-resident listed companies do not to be included. This is because they are exempt from the FIF rules.

Note: Trusts cannot use the $50,000 cost exemption so the FIF rules apply from the first $1 of FIF applicable overseas share investments!

Professionally managed portfolios

If you have a professionally managed portfolio through a firm like Craigs or Forsyth Barr (for instance), these calculations will be included in your annual portfolio summary.

Investments that you manage yourself

If you hold shares in your own name, you will need to monitor the cost and provide all details for tax calculations.

Overseas shares and NZ tax implications -Understanding the Foreign Investment Fund (FIF) Rules

The FIF rules, introduced in 2007, tax low-income-yielding overseas investments that tend to have higher capital growth compared to NZ shares. The tax is calculated using the lower of the Fair Dividend Rate (FDR) method or Comparative Value (CV) method.

As mentioned above, investors are not subject to the FIF rules if the original cost of their investment (excluding shares in Australian-resident listed companies) is NZ$50,000 or less. Such investors pay tax only on dividends if they hold the shares long-term and are not required to calculate income under the FIF rules.

A comparison of FDR & CV methods

Scenario: James, a New Zealand resident, owns shares in a foreign company. These cost over $50,000 so are subject to the FIF rules. The market value of these shares at the start of the income year is NZ$100,000, and at the end of the year, it is NZ$103,000. James receives no dividends during the year.

FIF Calculation:

• Using the Comparative Value (CV) method, James’s FIF income is NZ$3,000 (NZ$103,000 – NZ$100,000).
• Using the Fair Dividend Rate (FDR) method, James’s FIF income is 5% of the opening balance, which is NZ$5,000.

Disadvantage: If James chooses the FDR method, he will have to report NZ$5,000 as FIF income, which is higher than the actual gain of NZ$3,000. This results in a higher tax liability compared to the CV method.

FIF Rules: Potential for Higher Tax Liability vs Actual Income

In some cases, FIF rules may mean a higher tax liability compared to if tax was only on the actual income received.

Scenario: Olivia, owns shares in a foreign company with a cost of over $50,000. The market value of these shares at the start of the income year is NZ$60,000. She receives $1,500 of dividends during the year.

FIF Calculation:

• Using the Fair Dividend Rate (FDR) method, Olivia’s FIF income is 5% of the opening balance, which is NZ$3,000.

Therefore, Olivia is paying tax on $3,000 even though her actual income received is $1,500. It therefore can be seen she is paying tax on $1,500 more than she otherwise would need to be paying tax on (i.e if the FIF rules didn’t apply).

This is a common scenario where there are a lot of high growth shares in your portfolio that pay little or no dividends. For example, Nvidia shares.

Investment vs. Trading: Tax Implications

If you hold shares long-term, you are unlikely to have additional tax issues. However, if you buy shares with the intention to sell them at a profit, the IRD may consider you a trader. As a trader, any money you make or lose from selling shares will count towards your total untaxed income for the year, impacting your tax obligations.

How the IRD Determine Who is a Share Trader

The IRD uses two tests to determine trading status:

1. You are in the business of dealing in shares. Regularly buying and selling shares with a level of professionalism, especially if using borrowed money.
2. You have an intention to making a profit: Buying shares with the intention of selling them for a profit or buying highly volatile shares to flip.

Self-Assessment Tax Regime

New Zealand operates a self-assessment tax regime. This means it’s your responsibility to report the correct amount of income to the IRD. This is if you are preparing your own return or providing the relevant information to your accountant. Good record-keeping is crucial.

How Will the IRD Know about my Overseas Shares?

With advanced computer systems and international data-sharing arrangements, the IRD has extensive information about foreign income sources. In addition, the have information on overseas bank accounts and investments.

Strategies to Manage Your Overseas Shares and NZ Tax Implications

The FIF regime does add another layer of complexity to tax time. Here, are some ways to help manage this.

1. The most obvious is keep investments under this threshold. However, this is not a long-term view. For example, according to Vanguard AUD$10,000 invested in 1992 would be worth AUD$182,376 in 2022 if it were invested in US Shares. See the index comparison link here.
2. Utilise the under NZ$50,000 threshold in your partner’s name. Therefore, you each can have no more than $50,000 before the rules apply.
3. If you are investing on behalf of your children, ensure the account is in their name and under their IRD number.
4. Planning on trading shares? There may be an issue where you also want to hold shares long-term and expect to pay no tax on these long-term investments. Please contact us for specific advice on this.
5. Be prepared that tax compliance under the FIF rules are admin intensive and there is an associated cost with this at tax time.

Navigating Tax in NZ

Overseas shares and NZ tax implications often require professional advice from an accountant to ensure compliance with tax laws.

Business Like NZ has been providing professional, yet affordable tax and business advice to the Auckland region and beyond for years!

If you would like to discuss your tax obligations with us, please contact us at the office.

For specific investment advice, consult your licensed investment advisor. We have trusted partners in our network should you need a contact.