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Speaker 1: Jorda and welcome to this episode of Shed Lunch, where

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Speaker 1: we delve into the often vexed subject of tax.

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Speaker 2: Yes, that's right.

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Speaker 1: We're going to do a one oh one on what

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Speaker 1: it means to invest in individual companies and funds and

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Speaker 1: to keep it as simple as we can. I'm joined

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Speaker 1: by Mark lash, a partner with Deloitte.

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Speaker 3: Private investing involves risk you might lose the money you

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Speaker 3: start with. We recommend talking to a licensed financial advisor.

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Speaker 3: We also recommend reading product disclosure documents before deciding to invest.

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Speaker 3: Everything you're about to see and hear is current at

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Speaker 3: the time of recording.

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Speaker 2: Welcome to studio Mark, Thanks Allen.

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Speaker 1: Now, tax for most of us, I know it's your

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Speaker 1: every day, but for most of us it's a tricky subject.

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Speaker 1: Why do you think it is.

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Speaker 4: Well, tax is very spac specific and there's a lot

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Speaker 4: of complexity in the rules that we have in New Zealand.

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Speaker 4: And some of those rules are relatively simplistic at the

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Speaker 4: at the simple investment end, and some of those rules

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Speaker 4: are incredibly complex when we start to get into things

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Speaker 4: like foreign investment funds and investing in those. So it's

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Speaker 4: always important I think to you know, to remember that

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Speaker 4: because text is specific, you've got to be too careful

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Speaker 4: to ensure that the that you take advice where that

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Speaker 4: is appropriate, and ensure that a lot of the advice

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Speaker 4: that's actually written in terms of iety commentaries and the

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Speaker 4: like of your generic right, so they are intended to

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Speaker 4: be guides, are not necessarily specific advice. So our recommendation

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Speaker 4: to clients is always to take specific advice where they

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Speaker 4: need to take that advice, and to be very careful

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Speaker 4: around ensuring that they don't just rely on generic comments.

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Speaker 1: What about AI, there's a lot of chet GP text

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Speaker 1: kind of questions you can throw in and get all

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Speaker 1: sorts of answers.

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Speaker 2: What's your experience there.

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Speaker 4: I think AI is probably in its infancy at the moment,

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Speaker 4: so you do want to be a little bit careful

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Speaker 4: about you what you are relying on. Ultimately, Lee, in

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Speaker 4: New Zealand, it's up to the individual taxpayer to ensure

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Speaker 4: that their tax positions are correct, and so it's so

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Speaker 4: important that they do take advice in the right way

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Speaker 4: or rely on the right type of information. My experience

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Speaker 4: is that tools like chat GBT are credibly useful tools,

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Speaker 4: but you do need to be careful that they provide

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Speaker 4: you just with generic comment rather than specific advice.

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Speaker 1: Okay, so let's think about the retail investor then, what

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Speaker 1: would be the things that they need to consider. I mean,

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Speaker 1: you can have dividends and you can have share gains

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Speaker 1: and losses. Obviously, what does a retail investor need to

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Speaker 1: think about?

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Speaker 4: Yes, at the end of each year, a retail investor

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Speaker 4: needs to ensure that they have appropriately accounted for the

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Speaker 4: income that they've received from their investments, whether it's interest

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Speaker 4: or dividends that they've received, and those need to be

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Speaker 4: brought to tax and any sort of square up amounts

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Speaker 4: dealt with with inland revenue. It's also appropriate for investors

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Speaker 4: to stand back and reflect on the nature of the

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Speaker 4: activity that they've can do during the year. So we

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Speaker 4: don't have a comprehensive capital gains tax in New Zealand,

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Speaker 4: but we do tax gains from investments where those investments

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Speaker 4: have been purchased for a dominant purpose of selling them

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Speaker 4: if they are part of a business activity or share

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Speaker 4: trading activity conducted by that person. So we do recommend

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Speaker 4: that people stand back at the end of the year

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Speaker 4: and have a look at what they've done from an

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Speaker 4: investment activity. Point of view and reflect on whether or

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Speaker 4: not they might have some concerns that Inland Revenue might

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Speaker 4: view them as as being a trader in business or

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Speaker 4: having acquired those investments for a purpose of disposing of them.

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Speaker 1: Mark with platforms like Shaersy's, we deduct the tax from

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Speaker 1: the distributions for most, not all investors. But it would

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Speaker 1: be fair to say that investors can't just set and forget.

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Speaker 1: There are obligations that they have under tax, aren't.

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Speaker 4: They Absolutely so, As I mentioned before, the obligation to

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Speaker 4: ensure that the tax appropriate tax has been paid does

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Speaker 4: fall on the relevant investor. It's it's not Chazy's responsibility.

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Speaker 4: And if the investor hasn't got it right, then Inland

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Speaker 4: Revenue will will be in contact. I think you know

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Speaker 4: the things that Chas's and other platforms do you know,

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Speaker 4: do the services they provide do issis greatly if you like,

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Speaker 4: in terms of ensuring that tax has been withheld. Ideally,

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Speaker 4: it it ensures that for most investors they're not going

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Speaker 4: to get a nasty surprise come come the end of

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Speaker 4: the year. But in some instances, when a conservative approach

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Speaker 4: is taken around, you know, withholding, it can actually mean

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Speaker 4: for some investors that they are actually entitled to refunds

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Speaker 4: of amounts because in New Zealand we do we do

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Speaker 4: tax people on a on a marginal rate basis. So

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Speaker 4: what that means is that as people earn more, their

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Speaker 4: tax rate progressively increases. So you know, if a flat

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Speaker 4: rate of thirty three percent tax has been deducted, that

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Speaker 4: could be well in excess of, for example, tax rate

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Speaker 4: applying to a twelve year old student. Yeah, who's only

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Speaker 4: got a ten and a half percent tax rate, So

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Speaker 4: there could be refundaments that are available.

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Speaker 1: Let's unpack the difference between if I invest in an

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Speaker 1: individual company or if I, say, want to invest in

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Speaker 1: a managed fund or an exchange traded fund, what's the

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Speaker 1: tax treatment? Because I understand one could be more effective

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Speaker 1: than the other.

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Speaker 4: Yes, So with most managed funds and exchange traded funds,

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Speaker 4: they are wrapped up in a product that we refer

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Speaker 4: to as a portfolio investment entity or pie. With a pie,

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Speaker 4: they typically take care of all of the tax on

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Speaker 4: behalf of the relevant investor, so investors don't then need

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Speaker 4: to include their income from those investments in their personal

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Speaker 4: tax return. The way that works is that the investor

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Speaker 4: is required to notify the PIE of their prescribed investor rate,

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Speaker 4: which broadly equates to what their margin digital tax rate

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Speaker 4: would be on that investment income. The PIE in that

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Speaker 4: instance then ensures that the relevant tax is deducted and

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Speaker 4: paid within the PIE on behalf of the investor and

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Speaker 4: pays out the tax paid return to the investor. So

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Speaker 4: in those situations, investors are not required to include that

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Speaker 4: income in their tax return. Now, the maximum pier that

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Speaker 4: can be elected is twenty eight percent, So for investors

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Speaker 4: that are subject to twenty eight to thirty three or

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Speaker 4: thirty nine percent marginal tax rates, using a or investing

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Speaker 4: into a PIE can can generate a more advantageous tax outcome.

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Speaker 4: If we can compare that with investing directly into a company.

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Speaker 4: Then typically dividends from New Zealand or Australia and the

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Speaker 4: like are then subject to tax at the marginal rate

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Speaker 4: of that particular investor. So if you have a tax

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Speaker 4: rate of thirty three you're thirty nine percent, then that

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Speaker 4: is the rate of tax that you will pay on

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Speaker 4: that investment. So you can see if you were to

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Speaker 4: be able to have an equivalent investment in a PIE

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Speaker 4: that could be kept at twenty eight percent rather than

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Speaker 4: those high rates. It's really important in that context for

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Speaker 4: investors to ensure that they have notified of the correct

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Speaker 4: pir that applies to them so that the correct amount

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Speaker 4: of tax can be deducted by the pie and an

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Speaker 4: event that you get it wrong, that can sometimes lead

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Speaker 4: to adjustments being made by a land revenue and compliance

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Speaker 4: costs as you sort that out whether you've underpaid or

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Speaker 4: overpaid in that particular instance.

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Speaker 1: Are there penalties that iod hands down? If your light

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Speaker 1: sounds quite dracony and saying like that, but you know

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Speaker 1: if you aren't paying the right amount of tax?

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Speaker 2: I mean, it obviously.

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Speaker 1: Depends on the individual and the amounts involved. But is

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Speaker 1: there straight penalties that we know of?

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Speaker 4: There are? There is a whole penalty regime that exists

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Speaker 4: within the Income Tax Act where where you know not

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Speaker 4: the correct amount of tax is not being paid at

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Speaker 4: that at the correct time. In our experience, thus far,

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Speaker 4: inland Revenue hasn't taken a hard line, if you like,

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Speaker 4: in relation to a failure to elect the correct rates.

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Speaker 4: It's more been focused around ensuring that the top up

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Speaker 4: or catch up amount of taxes collected and that the

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Speaker 4: correct pr is applied going forward.

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Speaker 1: Is there a hunch though, that a number of investors

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Speaker 1: maybe aren't applying the correct or paying the correct tax.

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Speaker 4: Yeah, Inland Revenue's got quite sophisticated in and around how

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Speaker 4: they manage these types of things now and do have

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Speaker 4: a number of tools that they can use to ensure

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Speaker 4: that they are matching the correct pr to the relevant taxpayer.

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Speaker 4: Our experience is that it's less likely that people are

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Speaker 4: going to be able to sort of game the system

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Speaker 4: by having the incorrect rate.

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Speaker 1: There's lots of jargon with tax it would appear now

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Speaker 1: often we hear about imputation or franking credits. I think

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Speaker 1: victation as New Zealand franking is often if you are

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Speaker 1: invested in the AX or the Australian share market, can

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Speaker 1: you explain to us when they come in to be

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Speaker 1: You're quite right.

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Speaker 4: Imputation credits and franking credits are in essence the same thing,

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Speaker 4: but just ones in New Zealand credit and the others

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Speaker 4: are an Australian credit. The underlying concept around it is

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Speaker 4: that when a company makes makes a profit, it has

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Speaker 4: to pay some tax, and that tax that the company

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Speaker 4: pays should be able to be passed through to the

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Speaker 4: shareholder for them to claim as a credit. So in

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Speaker 4: New Zealand, the company tax that is paid generates an

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Speaker 4: imputation credit that the shareholder can claim back. In Australia,

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Speaker 4: the company tax paid generates a franking credit that an

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Speaker 4: Australian resident shareholder can claim back. So if a company

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Speaker 4: makes one hundred dollars a profit, it has to pay

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Speaker 4: corporate tax of twenty eight dollars. That same one hundred

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Speaker 4: dollar a profit also gets taxed in the hands of

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Speaker 4: the shareholder when it's distributed, but the shareholder is able

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Speaker 4: to claim back that twenty eight dollars company tax that's

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Speaker 4: already been paid as an imputation credit.

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Speaker 1: When does that happen though? So if I in my

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Speaker 1: tax return, am I? If I see the word gross dividend?

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Speaker 1: Is that one hundred dollars? But actually I then get

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Speaker 1: some money back?

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Speaker 4: Yeah, So the gross dividend concept is recognizing the cash

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Speaker 4: that's been paid to the investor together with the imputation

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Speaker 4: credit that is attached to that dividend, plus any withholding

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Speaker 4: tax that's been deducted. So it's that gross amount that

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Speaker 4: is required to be put into the investor's tax return

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Speaker 4: or tax calculation that's then subject to tax at the

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Speaker 4: tax rate of the investor, but then you can claim

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Speaker 4: a credit against that tax. And the credits that you

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Speaker 4: can claim are the imputation credit that's been attached and

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Speaker 4: also any withholding tax that's been deducted, and if there

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Speaker 4: is an excess amount that can sometimes be refunded.

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Speaker 1: So if I'm investing into Australia, then I want to

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Speaker 1: be tax efficient or as efficient as.

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Speaker 2: I can be.

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Speaker 1: I need to keep an eye on those franking credits

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Speaker 1: and percentage thereof.

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Speaker 4: Yeah, I think it's always important to start with tax.

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Speaker 4: Shouldn't be the tail wagging the roll, you know, you

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Speaker 4: should always start with a sound investment plan, diversified investment portfolio,

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Speaker 4: which as well outside my area of expertise naturally, but

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Speaker 4: it is useful to just sort of keep an eye

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Speaker 4: on the way in which the taxation rules might apply

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Speaker 4: to the different types of returns that you're receiving from

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Speaker 4: from your investment portfolio, and certainly in the case of

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Speaker 4: Australian investments into Australian company, it's important to just keep

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Speaker 4: in mind those ones that are that are paying a

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Speaker 4: franked dividend and those that are paying an unfranked dividend,

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Speaker 4: and the reason for the subtle difference is that if

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Speaker 4: the dividend coming out of Australia is not fully franked,

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Speaker 4: then it'll be subject to withholding tax. Those withholding taxes

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Speaker 4: are able to be claimed as a credit in New

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Speaker 4: Zealand in most circumstances, so sometimes you can get sit

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Speaker 4: as subtle differences in the after tax return or the

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Speaker 4: effective tax rate that comes from investing into Australian entities.

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Speaker 1: What about dual listed companies, We've got quite a few

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Speaker 1: obviously on chess. Would it be more tax advantageous if

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Speaker 1: you like to invest in the New Zealand share market

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Speaker 1: as opposed to the ASEX for them.

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Speaker 4: Well, typically from a tax perspective, it shouldn't make any

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Speaker 4: any difference in the sense that a New Zealand company

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Speaker 4: that's registered on the Australian Australian Stock Exchange is still

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Speaker 4: in New Zealand company still will be paying if you

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Speaker 4: like a New Zealand dividend with imputation credits, So those

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Speaker 4: sorts of things shouldn't necessarily influence a New Zealand investors' decision.

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Speaker 4: One of the things that investor might look at is

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Speaker 4: that if an entity is dual listed, is whether that's

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Speaker 4: because they are deriving income from both New Zealand and Australia,

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Speaker 4: and whether there might be subtle differences in the way

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Speaker 4: that that company pays to it and such that they're

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Speaker 4: able to, if you like, provide imputation credits to New

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Speaker 4: Zealand investors and franking credits to Australian investors, because because

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Speaker 4: neither of those credits are able to be claimed in

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Speaker 4: either country.

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Speaker 1: One thing mark too, that often comes up is you

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Speaker 1: can merely go along investing and you get your dividends

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Speaker 1: and your tax is all deducted and hopefully everything's happy.

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Speaker 2: But is there a time when investors really need to

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Speaker 2: be thinking.

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Speaker 1: About or is there extra that I should be telling

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Speaker 1: the IID And I'm assuming that.

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Speaker 2: When you look at an entire.

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Speaker 1: Portfolio that might have property, it might have other assets.

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Speaker 1: I'm talking beyond say you're Cheesy's portfolio.

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Speaker 4: Yes, so if you're not a natural person, so companies

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Speaker 4: and trusts are all required to file a tax return

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Speaker 4: for natural persons. You've sort of got two different pathways

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Speaker 4: that you end up going down. The first is the

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Speaker 4: sort of the simplified approach, which is any sense a

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Speaker 4: letter of assessment by inland revenue. So if Inland Revenue

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Speaker 4: believe that if all of the income that the individual

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Speaker 4: has received has been taxed largely its source in New Zealand,

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Speaker 4: so for example, sellaring wages subject to PYE investment income

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Speaker 4: that's been subject to withholding tax or imputation credits in

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Speaker 4: New Zealand. And if Inland Revenue believes that that's the

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Speaker 4: sole sources of your income and they have most of

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Speaker 4: that information necessary to do a calculation of the assessment

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Speaker 4: for the year, then for those individuals, they'll receive this

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Speaker 4: letter of assessment and their responsibility is to review that,

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Speaker 4: to check that and to make sure that it's right.

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Speaker 4: If it's not right, there's an obligation to notify a

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Speaker 4: land revenue changes. There is a little sort of deminimous

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Speaker 4: rule there around other income that's sort of less two

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Speaker 4: hundred dollars or less. So if there's an amount that's

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Speaker 4: missing from that assessment and it's two hundred dollars or less,

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Speaker 4: then there is no requirement to notify in Land revenue

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Speaker 4: of that fact. If an in revenue doesn't believe that

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Speaker 4: it has all of that information necessary to do that assessment.

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Speaker 4: Then individuals will be required to file an IR three

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Speaker 4: tax return, and that could include things like there's overseas income,

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Speaker 4: there's income subject to the under the fIF or Foreign

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Speaker 4: Investment Fund rules. There could be rents from property, there

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Speaker 4: could be tax losses, there could be income from self employment,

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Speaker 4: those sorts of things.

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Speaker 1: That's a nice segue to investing offshore. And I don't

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Speaker 1: so much mean Australia, but perhaps the US, which you know,

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Speaker 1: we have a lot of companies on Cheesy's that are

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Speaker 1: US based investing there. Things get a little bit different,

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Speaker 1: don't they with the I think the FAF is the

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Speaker 1: kind of the acronym that's everywhere.

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Speaker 2: If you can explain that for US.

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Speaker 4: I'll certainly have a go. So the Foreign Investment Fund

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Speaker 4: regime is intended to capture all foreign investments, particularly or

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Speaker 4: traditionally into companies. There is Australia is actually caught within

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Speaker 4: the context of those rules. However, because of our close

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Speaker 4: economic relationship with Australia and the fact that a lot

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Speaker 4: of New Zealanders invest into Australia, we have what's called

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Speaker 4: a Foreign Investment Investment Fund Exemption list. So that typically

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Speaker 4: is entities in Australia that are listed on the Australian

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Speaker 4: Stock Exchange that are resident in Australia, those companies are

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Speaker 4: included in a sort of an exemption list. What that

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Speaker 4: effectively means is that you don't need to apply the

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Speaker 4: Foreign Investment Fund rules to those particular investments. You can

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Speaker 4: just treat them, going to call it as normal investments

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Speaker 4: where you pay tax on dividends as and when they

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Speaker 4: are received. For everybody else or everywhere else in the

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Speaker 4: world that is subject to the Foreign Investment Fund rules.

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Speaker 4: What effectively that does is it sort of ignores, if

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Speaker 4: you like, the dividends that are paid, and the investments

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Speaker 4: are taxed on the basis of a number of methods,

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Speaker 4: but in the sense sort of deemed income for tax

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Speaker 4: purposes and for individuals. The two main options there are

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Speaker 4: the fair dividend rate and the comparative value method.

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Speaker 1: So you can choose which and just to stop you

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Speaker 1: their mark, I think you wouldn't be subject to the

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Speaker 1: Foreign Investment Fund unless you were investing fifty thousand in

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Speaker 1: New Zealand or you had that in investments or is

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Speaker 1: that right?

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Speaker 4: It's correct. There's a deminimus so an exclusion from having

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Speaker 4: to apply these horrendous rules. If you if you if

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Speaker 4: you hold foreign investment fund interests that cost are less

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Speaker 4: than New Zealand fifty thousand dollars, if you are unfortunately

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Speaker 4: fortunate enough to hold investments over that threshold, then you

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Speaker 4: will be subject to these rules and the complications that

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Speaker 4: go with that.

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Speaker 1: So if you had a couple of thousand dollars in Tesla,

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Speaker 1: for example.

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Speaker 2: You'd probably be all right, that's correct.

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Speaker 1: It would only be if you had a fear bit

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Speaker 1: more thinking of that though, surely at that stage you'd

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Speaker 1: begin an advisor to have a lock unless you were

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Speaker 1: a real wizard tax.

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Speaker 4: Yeah, there's not many people that have a go can

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Speaker 4: I use that phrase? It doing it themselves. It's these

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Speaker 4: rules are are incredibly complicated. The method dollar, the methods

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Speaker 4: that are that are available to people to sort of

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Speaker 4: return their income are tricky. And so we do recommend

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Speaker 4: that if you are subject to the foreign investment fund rules,

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Speaker 4: that you do seek to get some advice in and

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Speaker 4: around the preparation of your tax position on an annual basis, because.

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Speaker 1: Could it be that without realizing it, you might actually

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Speaker 1: almost be paying more tax than you're actually getting in

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Speaker 1: a return.

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Speaker 4: That's correct, you know. So, for example, under the fair

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Speaker 4: dividend rate method, you have a deemed dividend equal to

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Speaker 4: five percent of the opening market value of that investment.

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Speaker 4: So if you'd bought one thousand dollars of Tesla shares,

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Speaker 4: for example, and they were valued at one thousand dollars

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Speaker 4: on the first of April twenty twenty four, then your

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Speaker 4: deemed income for the year will be five percent of that.

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Speaker 4: And if the dividend yield coming out of that Tesla

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Speaker 4: stock is you know, around the one one to two percent,

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Speaker 4: which often American companies do tend to have relatively low

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Speaker 4: dividend yields, the actual cash dividend that you receive may

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Speaker 4: be well less than the deemed income that you have

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Speaker 4: from that investment under the fair dividend rate. There is

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Speaker 4: another methodology that's available to natural persons and trustees of trusts,

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Speaker 4: and that's to use comparative value. And that comparative value

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Speaker 4: methodology effectively seeks to tax you on the unrealized gain

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Speaker 4: that you've had during the year. So if the shares

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Speaker 4: were worth a thousand dollars at the beginning of the

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Speaker 4: year and they're worth nine hundred and you've made a loss.

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Speaker 4: You have a choice to be able to say, I'll

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Speaker 4: take that comparative value method. I'll take that loss, in

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Speaker 4: which case your income under the Foreign Investment Fund rules

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Speaker 4: is nil, and you do have the option to choose

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Speaker 4: between years. So yeah, some of it can be quite complicated.

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Speaker 1: Just thinking if you've got a less complicated portfolio, but

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Speaker 1: you are wanting to make sure that you are paying

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Speaker 1: the tax you should be. Apart from the fact that

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Speaker 1: she says has deducted from the distribution so far, are

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Speaker 1: what resources are out there? I mean, does this wonderful podcast,

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Speaker 1: But apart from the.

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Speaker 4: Yeah, so Inland Revenue you have some really good material

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Speaker 4: on their website. You can obviously avail yourself of tools

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Speaker 4: like chat GPT just sort of to sort of give

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Speaker 4: you some sort of base base information around it shares.

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Speaker 4: These and a number of other investment platform and providers

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Speaker 4: produce resources that are intended to help provide some advice

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Speaker 4: to investors about how these rules might potentially potentially work.

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Speaker 4: Our recommendation would be yeah, by all means, you know,

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Speaker 4: undertake and do a bit of due diligence, get to

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Speaker 4: get get familiar with with how you think the rules

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Speaker 4: might apply. But then if you do have foreign investment

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Speaker 4: fund interests, we'd recommend you engage in an appropriate skill

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Speaker 4: tax advisor to help you sort of work your way

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Speaker 4: through those rules. It does get quite complicated, particularly if

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Speaker 4: you've got dividends that are being received and there's withholding

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Speaker 4: tax that's been deducted overseas, and you've got some withholding

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Speaker 4: tax that's been deducted New Zealand. Sometimes the withholding tax

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Speaker 4: that you can claim might be limited under the double

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Speaker 4: taxation agreements that New Zealand has with the US, for example,

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Speaker 4: and sometimes not the correct amount of taxes in fact

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Speaker 4: being deducted, and so you may be limited around how

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Speaker 4: much you can actually claim. So someone can get quite

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Speaker 4: tricky and you have to track and calculate the amount

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Speaker 4: of tax credits on a line by line, investment by

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Speaker 4: investment basis.

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Speaker 1: Thanks Mark for your insights today. It's been great to

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Speaker 1: have you in the studio.

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Speaker 4: Thanks Helen. Hopefully I've managed to make tax a little

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Speaker 4: less confusing for people, but you really appreciate the opportunity.

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Speaker 1: And thanks everyone for tuning in. Hopefully that was a

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Speaker 1: bit more simple for you. You can watch shared Lunch on YouTube,

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Speaker 1: or you can follow the podcast wherever you get your podcasts.

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Speaker 1: Leave us at rating and tell us what you'd like

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Speaker 1: to hear next. See you next time on Shared Lunch