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.
In New Zealand, dividends are taxable regardless of whether they are received from local or overseas companies. This means that any dividends you earn must be included in your taxable income and reported to the Inland Revenue Department (IRD). The tax treatment is consistent for both domestic and international dividends. This ensures that all dividend income is subject to the same tax rules.
If your investments cost under $50,000, you may need to do nothing apart from including dividends in your tax return.
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.
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.
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.
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!
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.
If you hold shares in your own name, you will need to monitor the cost and provide all details for tax calculations.
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.
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:
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.
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:
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.
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.
The IRD uses two tests to determine trading status:
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.
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.
The FIF regime does add another layer of complexity to tax time. Here, are some ways to help manage this.
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.