Speaker 1: Jorda and welcome to this episode of Shed Lunch, where
Speaker 1: we delve into the often vexed subject of tax.
Speaker 2: Yes, that's right.
Speaker 1: We're going to do a one oh one on what
Speaker 1: it means to invest in individual companies and funds and
Speaker 1: to keep it as simple as we can. I'm joined
Speaker 1: by Mark lash, a partner with Deloitte.
Speaker 3: Private investing involves risk you might lose the money you
Speaker 3: start with. We recommend talking to a licensed financial advisor.
Speaker 3: We also recommend reading product disclosure documents before deciding to invest.
Speaker 3: Everything you're about to see and hear is current at
Speaker 3: the time of recording.
Speaker 2: Welcome to studio Mark, Thanks Allen.
Speaker 1: Now, tax for most of us, I know it's your
Speaker 1: every day, but for most of us it's a tricky subject.
Speaker 1: Why do you think it is.
Speaker 4: Well, tax is very spac specific and there's a lot
Speaker 4: of complexity in the rules that we have in New Zealand.
Speaker 4: And some of those rules are relatively simplistic at the
Speaker 4: at the simple investment end, and some of those rules
Speaker 4: are incredibly complex when we start to get into things
Speaker 4: like foreign investment funds and investing in those. So it's
Speaker 4: always important I think to you know, to remember that
Speaker 4: because text is specific, you've got to be too careful
Speaker 4: to ensure that the that you take advice where that
Speaker 4: is appropriate, and ensure that a lot of the advice
Speaker 4: that's actually written in terms of iety commentaries and the
Speaker 4: like of your generic right, so they are intended to
Speaker 4: be guides, are not necessarily specific advice. So our recommendation
Speaker 4: to clients is always to take specific advice where they
Speaker 4: need to take that advice, and to be very careful
Speaker 4: around ensuring that they don't just rely on generic comments.
Speaker 1: What about AI, there's a lot of chet GP text
Speaker 1: kind of questions you can throw in and get all
Speaker 1: sorts of answers.
Speaker 2: What's your experience there.
Speaker 4: I think AI is probably in its infancy at the moment,
Speaker 4: so you do want to be a little bit careful
Speaker 4: about you what you are relying on. Ultimately, Lee, in
Speaker 4: New Zealand, it's up to the individual taxpayer to ensure
Speaker 4: that their tax positions are correct, and so it's so
Speaker 4: important that they do take advice in the right way
Speaker 4: or rely on the right type of information. My experience
Speaker 4: is that tools like chat GBT are credibly useful tools,
Speaker 4: but you do need to be careful that they provide
Speaker 4: you just with generic comment rather than specific advice.
Speaker 1: Okay, so let's think about the retail investor then, what
Speaker 1: would be the things that they need to consider. I mean,
Speaker 1: you can have dividends and you can have share gains
Speaker 1: and losses. Obviously, what does a retail investor need to
Speaker 1: think about?
Speaker 4: Yes, at the end of each year, a retail investor
Speaker 4: needs to ensure that they have appropriately accounted for the
Speaker 4: income that they've received from their investments, whether it's interest
Speaker 4: or dividends that they've received, and those need to be
Speaker 4: brought to tax and any sort of square up amounts
Speaker 4: dealt with with inland revenue. It's also appropriate for investors
Speaker 4: to stand back and reflect on the nature of the
Speaker 4: activity that they've can do during the year. So we
Speaker 4: don't have a comprehensive capital gains tax in New Zealand,
Speaker 4: but we do tax gains from investments where those investments
Speaker 4: have been purchased for a dominant purpose of selling them
Speaker 4: if they are part of a business activity or share
Speaker 4: trading activity conducted by that person. So we do recommend
Speaker 4: that people stand back at the end of the year
Speaker 4: and have a look at what they've done from an
Speaker 4: investment activity. Point of view and reflect on whether or
Speaker 4: not they might have some concerns that Inland Revenue might
Speaker 4: view them as as being a trader in business or
Speaker 4: having acquired those investments for a purpose of disposing of them.
Speaker 1: Mark with platforms like Shaersy's, we deduct the tax from
Speaker 1: the distributions for most, not all investors. But it would
Speaker 1: be fair to say that investors can't just set and forget.
Speaker 1: There are obligations that they have under tax, aren't.
Speaker 4: They Absolutely so, As I mentioned before, the obligation to
Speaker 4: ensure that the tax appropriate tax has been paid does
Speaker 4: fall on the relevant investor. It's it's not Chazy's responsibility.
Speaker 4: And if the investor hasn't got it right, then Inland
Speaker 4: Revenue will will be in contact. I think you know
Speaker 4: the things that Chas's and other platforms do you know,
Speaker 4: do the services they provide do issis greatly if you like,
Speaker 4: in terms of ensuring that tax has been withheld. Ideally,
Speaker 4: it it ensures that for most investors they're not going
Speaker 4: to get a nasty surprise come come the end of
Speaker 4: the year. But in some instances, when a conservative approach
Speaker 4: is taken around, you know, withholding, it can actually mean
Speaker 4: for some investors that they are actually entitled to refunds
Speaker 4: of amounts because in New Zealand we do we do
Speaker 4: tax people on a on a marginal rate basis. So
Speaker 4: what that means is that as people earn more, their
Speaker 4: tax rate progressively increases. So you know, if a flat
Speaker 4: rate of thirty three percent tax has been deducted, that
Speaker 4: could be well in excess of, for example, tax rate
Speaker 4: applying to a twelve year old student. Yeah, who's only
Speaker 4: got a ten and a half percent tax rate, So
Speaker 4: there could be refundaments that are available.
Speaker 1: Let's unpack the difference between if I invest in an
Speaker 1: individual company or if I, say, want to invest in
Speaker 1: a managed fund or an exchange traded fund, what's the
Speaker 1: tax treatment? Because I understand one could be more effective
Speaker 1: than the other.
Speaker 4: Yes, So with most managed funds and exchange traded funds,
Speaker 4: they are wrapped up in a product that we refer
Speaker 4: to as a portfolio investment entity or pie. With a pie,
Speaker 4: they typically take care of all of the tax on
Speaker 4: behalf of the relevant investor, so investors don't then need
Speaker 4: to include their income from those investments in their personal
Speaker 4: tax return. The way that works is that the investor
Speaker 4: is required to notify the PIE of their prescribed investor rate,
Speaker 4: which broadly equates to what their margin digital tax rate
Speaker 4: would be on that investment income. The PIE in that
Speaker 4: instance then ensures that the relevant tax is deducted and
Speaker 4: paid within the PIE on behalf of the investor and
Speaker 4: pays out the tax paid return to the investor. So
Speaker 4: in those situations, investors are not required to include that
Speaker 4: income in their tax return. Now, the maximum pier that
Speaker 4: can be elected is twenty eight percent, So for investors
Speaker 4: that are subject to twenty eight to thirty three or
Speaker 4: thirty nine percent marginal tax rates, using a or investing
Speaker 4: into a PIE can can generate a more advantageous tax outcome.
Speaker 4: If we can compare that with investing directly into a company.
Speaker 4: Then typically dividends from New Zealand or Australia and the
Speaker 4: like are then subject to tax at the marginal rate
Speaker 4: of that particular investor. So if you have a tax
Speaker 4: rate of thirty three you're thirty nine percent, then that
Speaker 4: is the rate of tax that you will pay on
Speaker 4: that investment. So you can see if you were to
Speaker 4: be able to have an equivalent investment in a PIE
Speaker 4: that could be kept at twenty eight percent rather than
Speaker 4: those high rates. It's really important in that context for
Speaker 4: investors to ensure that they have notified of the correct
Speaker 4: pir that applies to them so that the correct amount
Speaker 4: of tax can be deducted by the pie and an
Speaker 4: event that you get it wrong, that can sometimes lead
Speaker 4: to adjustments being made by a land revenue and compliance
Speaker 4: costs as you sort that out whether you've underpaid or
Speaker 4: overpaid in that particular instance.
Speaker 1: Are there penalties that iod hands down? If your light
Speaker 1: sounds quite dracony and saying like that, but you know
Speaker 1: if you aren't paying the right amount of tax?
Speaker 2: I mean, it obviously.
Speaker 1: Depends on the individual and the amounts involved. But is
Speaker 1: there straight penalties that we know of?
Speaker 4: There are? There is a whole penalty regime that exists
Speaker 4: within the Income Tax Act where where you know not
Speaker 4: the correct amount of tax is not being paid at
Speaker 4: that at the correct time. In our experience, thus far,
Speaker 4: inland Revenue hasn't taken a hard line, if you like,
Speaker 4: in relation to a failure to elect the correct rates.
Speaker 4: It's more been focused around ensuring that the top up
Speaker 4: or catch up amount of taxes collected and that the
Speaker 4: correct pr is applied going forward.
Speaker 1: Is there a hunch though, that a number of investors
Speaker 1: maybe aren't applying the correct or paying the correct tax.
Speaker 4: Yeah, Inland Revenue's got quite sophisticated in and around how
Speaker 4: they manage these types of things now and do have
Speaker 4: a number of tools that they can use to ensure
Speaker 4: that they are matching the correct pr to the relevant taxpayer.
Speaker 4: Our experience is that it's less likely that people are
Speaker 4: going to be able to sort of game the system
Speaker 4: by having the incorrect rate.
Speaker 1: There's lots of jargon with tax it would appear now
Speaker 1: often we hear about imputation or franking credits. I think
Speaker 1: victation as New Zealand franking is often if you are
Speaker 1: invested in the AX or the Australian share market, can
Speaker 1: you explain to us when they come in to be
Speaker 1: You're quite right.
Speaker 4: Imputation credits and franking credits are in essence the same thing,
Speaker 4: but just ones in New Zealand credit and the others
Speaker 4: are an Australian credit. The underlying concept around it is
Speaker 4: that when a company makes makes a profit, it has
Speaker 4: to pay some tax, and that tax that the company
Speaker 4: pays should be able to be passed through to the
Speaker 4: shareholder for them to claim as a credit. So in
Speaker 4: New Zealand, the company tax that is paid generates an
Speaker 4: imputation credit that the shareholder can claim back. In Australia,
Speaker 4: the company tax paid generates a franking credit that an
Speaker 4: Australian resident shareholder can claim back. So if a company
Speaker 4: makes one hundred dollars a profit, it has to pay
Speaker 4: corporate tax of twenty eight dollars. That same one hundred
Speaker 4: dollar a profit also gets taxed in the hands of
Speaker 4: the shareholder when it's distributed, but the shareholder is able
Speaker 4: to claim back that twenty eight dollars company tax that's
Speaker 4: already been paid as an imputation credit.
Speaker 1: When does that happen though? So if I in my
Speaker 1: tax return, am I? If I see the word gross dividend?
Speaker 1: Is that one hundred dollars? But actually I then get
Speaker 1: some money back?
Speaker 4: Yeah, So the gross dividend concept is recognizing the cash
Speaker 4: that's been paid to the investor together with the imputation
Speaker 4: credit that is attached to that dividend, plus any withholding
Speaker 4: tax that's been deducted. So it's that gross amount that
Speaker 4: is required to be put into the investor's tax return
Speaker 4: or tax calculation that's then subject to tax at the
Speaker 4: tax rate of the investor, but then you can claim
Speaker 4: a credit against that tax. And the credits that you
Speaker 4: can claim are the imputation credit that's been attached and
Speaker 4: also any withholding tax that's been deducted, and if there
Speaker 4: is an excess amount that can sometimes be refunded.
Speaker 1: So if I'm investing into Australia, then I want to
Speaker 1: be tax efficient or as efficient as.
Speaker 2: I can be.
Speaker 1: I need to keep an eye on those franking credits
Speaker 1: and percentage thereof.
Speaker 4: Yeah, I think it's always important to start with tax.
Speaker 4: Shouldn't be the tail wagging the roll, you know, you
Speaker 4: should always start with a sound investment plan, diversified investment portfolio,
Speaker 4: which as well outside my area of expertise naturally, but
Speaker 4: it is useful to just sort of keep an eye
Speaker 4: on the way in which the taxation rules might apply
Speaker 4: to the different types of returns that you're receiving from
Speaker 4: from your investment portfolio, and certainly in the case of
Speaker 4: Australian investments into Australian company, it's important to just keep
Speaker 4: in mind those ones that are that are paying a
Speaker 4: franked dividend and those that are paying an unfranked dividend,
Speaker 4: and the reason for the subtle difference is that if
Speaker 4: the dividend coming out of Australia is not fully franked,
Speaker 4: then it'll be subject to withholding tax. Those withholding taxes
Speaker 4: are able to be claimed as a credit in New
Speaker 4: Zealand in most circumstances, so sometimes you can get sit
Speaker 4: as subtle differences in the after tax return or the
Speaker 4: effective tax rate that comes from investing into Australian entities.
Speaker 1: What about dual listed companies, We've got quite a few
Speaker 1: obviously on chess. Would it be more tax advantageous if
Speaker 1: you like to invest in the New Zealand share market
Speaker 1: as opposed to the ASEX for them.
Speaker 4: Well, typically from a tax perspective, it shouldn't make any
Speaker 4: any difference in the sense that a New Zealand company
Speaker 4: that's registered on the Australian Australian Stock Exchange is still
Speaker 4: in New Zealand company still will be paying if you
Speaker 4: like a New Zealand dividend with imputation credits, So those
Speaker 4: sorts of things shouldn't necessarily influence a New Zealand investors' decision.
Speaker 4: One of the things that investor might look at is
Speaker 4: that if an entity is dual listed, is whether that's
Speaker 4: because they are deriving income from both New Zealand and Australia,
Speaker 4: and whether there might be subtle differences in the way
Speaker 4: that that company pays to it and such that they're
Speaker 4: able to, if you like, provide imputation credits to New
Speaker 4: Zealand investors and franking credits to Australian investors, because because
Speaker 4: neither of those credits are able to be claimed in
Speaker 4: either country.
Speaker 1: One thing mark too, that often comes up is you
Speaker 1: can merely go along investing and you get your dividends
Speaker 1: and your tax is all deducted and hopefully everything's happy.
Speaker 2: But is there a time when investors really need to
Speaker 2: be thinking.
Speaker 1: About or is there extra that I should be telling
Speaker 1: the IID And I'm assuming that.
Speaker 2: When you look at an entire.
Speaker 1: Portfolio that might have property, it might have other assets.
Speaker 1: I'm talking beyond say you're Cheesy's portfolio.
Speaker 4: Yes, so if you're not a natural person, so companies
Speaker 4: and trusts are all required to file a tax return
Speaker 4: for natural persons. You've sort of got two different pathways
Speaker 4: that you end up going down. The first is the
Speaker 4: sort of the simplified approach, which is any sense a
Speaker 4: letter of assessment by inland revenue. So if Inland Revenue
Speaker 4: believe that if all of the income that the individual
Speaker 4: has received has been taxed largely its source in New Zealand,
Speaker 4: so for example, sellaring wages subject to PYE investment income
Speaker 4: that's been subject to withholding tax or imputation credits in
Speaker 4: New Zealand. And if Inland Revenue believes that that's the
Speaker 4: sole sources of your income and they have most of
Speaker 4: that information necessary to do a calculation of the assessment
Speaker 4: for the year, then for those individuals, they'll receive this
Speaker 4: letter of assessment and their responsibility is to review that,
Speaker 4: to check that and to make sure that it's right.
Speaker 4: If it's not right, there's an obligation to notify a
Speaker 4: land revenue changes. There is a little sort of deminimous
Speaker 4: rule there around other income that's sort of less two
Speaker 4: hundred dollars or less. So if there's an amount that's
Speaker 4: missing from that assessment and it's two hundred dollars or less,
Speaker 4: then there is no requirement to notify in Land revenue
Speaker 4: of that fact. If an in revenue doesn't believe that
Speaker 4: it has all of that information necessary to do that assessment.
Speaker 4: Then individuals will be required to file an IR three
Speaker 4: tax return, and that could include things like there's overseas income,
Speaker 4: there's income subject to the under the fIF or Foreign
Speaker 4: Investment Fund rules. There could be rents from property, there
Speaker 4: could be tax losses, there could be income from self employment,
Speaker 4: those sorts of things.
Speaker 1: That's a nice segue to investing offshore. And I don't
Speaker 1: so much mean Australia, but perhaps the US, which you know,
Speaker 1: we have a lot of companies on Cheesy's that are
Speaker 1: US based investing there. Things get a little bit different,
Speaker 1: don't they with the I think the FAF is the
Speaker 1: kind of the acronym that's everywhere.
Speaker 2: If you can explain that for US.
Speaker 4: I'll certainly have a go. So the Foreign Investment Fund
Speaker 4: regime is intended to capture all foreign investments, particularly or
Speaker 4: traditionally into companies. There is Australia is actually caught within
Speaker 4: the context of those rules. However, because of our close
Speaker 4: economic relationship with Australia and the fact that a lot
Speaker 4: of New Zealanders invest into Australia, we have what's called
Speaker 4: a Foreign Investment Investment Fund Exemption list. So that typically
Speaker 4: is entities in Australia that are listed on the Australian
Speaker 4: Stock Exchange that are resident in Australia, those companies are
Speaker 4: included in a sort of an exemption list. What that
Speaker 4: effectively means is that you don't need to apply the
Speaker 4: Foreign Investment Fund rules to those particular investments. You can
Speaker 4: just treat them, going to call it as normal investments
Speaker 4: where you pay tax on dividends as and when they
Speaker 4: are received. For everybody else or everywhere else in the
Speaker 4: world that is subject to the Foreign Investment Fund rules.
Speaker 4: What effectively that does is it sort of ignores, if
Speaker 4: you like, the dividends that are paid, and the investments
Speaker 4: are taxed on the basis of a number of methods,
Speaker 4: but in the sense sort of deemed income for tax
Speaker 4: purposes and for individuals. The two main options there are
Speaker 4: the fair dividend rate and the comparative value method.
Speaker 1: So you can choose which and just to stop you
Speaker 1: their mark, I think you wouldn't be subject to the
Speaker 1: Foreign Investment Fund unless you were investing fifty thousand in
Speaker 1: New Zealand or you had that in investments or is
Speaker 1: that right?
Speaker 4: It's correct. There's a deminimus so an exclusion from having
Speaker 4: to apply these horrendous rules. If you if you if
Speaker 4: you hold foreign investment fund interests that cost are less
Speaker 4: than New Zealand fifty thousand dollars, if you are unfortunately
Speaker 4: fortunate enough to hold investments over that threshold, then you
Speaker 4: will be subject to these rules and the complications that
Speaker 4: go with that.
Speaker 1: So if you had a couple of thousand dollars in Tesla,
Speaker 1: for example.
Speaker 2: You'd probably be all right, that's correct.
Speaker 1: It would only be if you had a fear bit
Speaker 1: more thinking of that though, surely at that stage you'd
Speaker 1: begin an advisor to have a lock unless you were
Speaker 1: a real wizard tax.
Speaker 4: Yeah, there's not many people that have a go can
Speaker 4: I use that phrase? It doing it themselves. It's these
Speaker 4: rules are are incredibly complicated. The method dollar, the methods
Speaker 4: that are that are available to people to sort of
Speaker 4: return their income are tricky. And so we do recommend
Speaker 4: that if you are subject to the foreign investment fund rules,
Speaker 4: that you do seek to get some advice in and
Speaker 4: around the preparation of your tax position on an annual basis, because.
Speaker 1: Could it be that without realizing it, you might actually
Speaker 1: almost be paying more tax than you're actually getting in
Speaker 1: a return.
Speaker 4: That's correct, you know. So, for example, under the fair
Speaker 4: dividend rate method, you have a deemed dividend equal to
Speaker 4: five percent of the opening market value of that investment.
Speaker 4: So if you'd bought one thousand dollars of Tesla shares,
Speaker 4: for example, and they were valued at one thousand dollars
Speaker 4: on the first of April twenty twenty four, then your
Speaker 4: deemed income for the year will be five percent of that.
Speaker 4: And if the dividend yield coming out of that Tesla
Speaker 4: stock is you know, around the one one to two percent,
Speaker 4: which often American companies do tend to have relatively low
Speaker 4: dividend yields, the actual cash dividend that you receive may
Speaker 4: be well less than the deemed income that you have
Speaker 4: from that investment under the fair dividend rate. There is
Speaker 4: another methodology that's available to natural persons and trustees of trusts,
Speaker 4: and that's to use comparative value. And that comparative value
Speaker 4: methodology effectively seeks to tax you on the unrealized gain
Speaker 4: that you've had during the year. So if the shares
Speaker 4: were worth a thousand dollars at the beginning of the
Speaker 4: year and they're worth nine hundred and you've made a loss.
Speaker 4: You have a choice to be able to say, I'll
Speaker 4: take that comparative value method. I'll take that loss, in
Speaker 4: which case your income under the Foreign Investment Fund rules
Speaker 4: is nil, and you do have the option to choose
Speaker 4: between years. So yeah, some of it can be quite complicated.
Speaker 1: Just thinking if you've got a less complicated portfolio, but
Speaker 1: you are wanting to make sure that you are paying
Speaker 1: the tax you should be. Apart from the fact that
Speaker 1: she says has deducted from the distribution so far, are
Speaker 1: what resources are out there? I mean, does this wonderful podcast,
Speaker 1: But apart from the.
Speaker 4: Yeah, so Inland Revenue you have some really good material
Speaker 4: on their website. You can obviously avail yourself of tools
Speaker 4: like chat GPT just sort of to sort of give
Speaker 4: you some sort of base base information around it shares.
Speaker 4: These and a number of other investment platform and providers
Speaker 4: produce resources that are intended to help provide some advice
Speaker 4: to investors about how these rules might potentially potentially work.
Speaker 4: Our recommendation would be yeah, by all means, you know,
Speaker 4: undertake and do a bit of due diligence, get to
Speaker 4: get get familiar with with how you think the rules
Speaker 4: might apply. But then if you do have foreign investment
Speaker 4: fund interests, we'd recommend you engage in an appropriate skill
Speaker 4: tax advisor to help you sort of work your way
Speaker 4: through those rules. It does get quite complicated, particularly if
Speaker 4: you've got dividends that are being received and there's withholding
Speaker 4: tax that's been deducted overseas, and you've got some withholding
Speaker 4: tax that's been deducted New Zealand. Sometimes the withholding tax
Speaker 4: that you can claim might be limited under the double
Speaker 4: taxation agreements that New Zealand has with the US, for example,
Speaker 4: and sometimes not the correct amount of taxes in fact
Speaker 4: being deducted, and so you may be limited around how
Speaker 4: much you can actually claim. So someone can get quite
Speaker 4: tricky and you have to track and calculate the amount
Speaker 4: of tax credits on a line by line, investment by
Speaker 4: investment basis.
Speaker 1: Thanks Mark for your insights today. It's been great to
Speaker 1: have you in the studio.
Speaker 4: Thanks Helen. Hopefully I've managed to make tax a little
Speaker 4: less confusing for people, but you really appreciate the opportunity.
Speaker 1: And thanks everyone for tuning in. Hopefully that was a
Speaker 1: bit more simple for you. You can watch shared Lunch on YouTube,
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