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Speaker 1: Kyoto Koto. Welcome to Shared Lunch. My name is Gus Watson,

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Speaker 1: investments lead at shares Z. Today we're going to look

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Speaker 1: at tax on foreign investment funds, also known as fIF tax.

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Speaker 1: If you have over fifty thousand dollars invested internationally, this

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Speaker 1: explaining episode is something you should listen to to make

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Speaker 1: sense of it all. I'm joined by Hayden Clark from

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Speaker 1: ID and Ross Nelson from PwC. But before we start,

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Speaker 1: I need to tell you that the tax comments in

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Speaker 1: this podcast are general in nature and for educational purposes only.

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Speaker 1: We recommend you confirm or seek tax advice on how

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Speaker 1: the TAXTA applies to your situation. If you're unsure it.

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Speaker 2: All, investing involves a risk you might lose the money

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Speaker 2: you start with, we recommend talking to a licensed financial advisor.

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Speaker 2: We also recommend reading product disclosure documents before deciding to invest.

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Speaker 2: Everything you're about to see and here is current at

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Speaker 2: the time of recording.

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Speaker 1: Thanks for being here, guys. fIF. It's this weird acronym.

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Speaker 1: What is fifth? What does it mean? Right?

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Speaker 3: So the fifth rules is really the short term for

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Speaker 3: the foreign investment fund rules and it's one of the

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Speaker 3: key sets of rules that applies to outbound investment from

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Speaker 3: New Zealand into foreign companies, particularly outbound investment into foreign

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Speaker 3: companies that aren't controlled by New Zealand residents. And so

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Speaker 3: that means they cover your typical scenario where you've got

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Speaker 3: a New Zealand resident investing internalfshore listed company where they

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Speaker 3: just have a portfolio interest of less than ten percent.

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Speaker 3: And one of the things that these rules are intended

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Speaker 3: to do is to ensure that those outbound investments in

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Speaker 3: foreign shares are taxed consistently, including where, for example, the

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Speaker 3: foreign company doesn't pay out a dividend.

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Speaker 1: As an individual investor, how do I know if the

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Speaker 1: fifth rules are relevant to me?

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Speaker 4: As Hayden said, the rules applied to investments in foreign companies,

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Speaker 4: So if you've got an investment in a US listed

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Speaker 4: stock or anywhere in the world, these rules are potentially relevant,

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Speaker 4: but they also apply to foreign unit trusts. What they

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Speaker 4: don't apply to I suppose if I just touch on

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Speaker 4: that is cryptocurrency typically will not be subject to these rules,

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Speaker 4: and there's some great id guidance around how your tax

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Speaker 4: on your cryptocurrency. They're not relevant to things like foreign

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Speaker 4: bank accounts, foreign investments and property not relevant to your

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Speaker 4: QI saver. So there's lots of things they're not relevant to.

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Speaker 4: But yeah, if you've got investments in foreign shares, then

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Speaker 4: they're generally relevant, but there are a couple of important

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Speaker 4: carve outs to that.

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Speaker 1: Yeah, I understand that some of the AX shares they're

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Speaker 1: not relevant for and the IOD website is the best

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Speaker 1: place to check that.

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Speaker 4: That's right. Yeah, if you've got investments in Australian listed shares,

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Speaker 4: then many of those are carved out. There's a specific

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Speaker 4: exemption for them, but not all of them. So yeah,

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Speaker 4: you do need a gain. The id's got a great

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Speaker 4: tool on the website. You just go to that, put

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Speaker 4: the ASEX ticker in and that'll tell you whether or

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Speaker 4: not that share is exempt from the fifth rules or not.

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Speaker 4: I suppose the other key exemption is the demonymous exemption,

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Speaker 4: and that will be relevant for many people as well.

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Speaker 1: Can you explain what you mean by the deminimus exemption.

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Speaker 4: Where you've got a total shareholdings and fifth of less

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Speaker 4: than fifty thousand dollars in New Zealand and that's a

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Speaker 4: cost test, so you need to know what you've paid

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Speaker 4: for these fifths. Then the fifth rules do not apply

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Speaker 4: to you and your tax more or less as if

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Speaker 4: they were an investment in a New Zealand listed company,

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Speaker 4: for example, so you would be taxed on those investments

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Speaker 4: on any dividends you receive from them. We don't have

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Speaker 4: a comprehensive capital gains tax in New Zealand, so for

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Speaker 4: most investors you wouldn't be taxed on any gains you realize,

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Speaker 4: although that's not always the case. If you're trading or

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Speaker 4: purchase those shares with intention of sale, then you'd be

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Speaker 4: taxed on them. But yeah, for most investors, if you're

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Speaker 4: in the Deminymous exception, then you'll just be text on

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Speaker 4: your diffendend income. It's a cost test of less than

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Speaker 4: fifty thousand dollars. A couple of things on that. If

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Speaker 4: you are investing using various platforms or different portfolios with

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Speaker 4: different brokers, you do need to look at all of

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Speaker 4: your fIF interests in total. If you're investing jointly, if

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Speaker 4: you're you might be investing with your spouse, then then

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Speaker 4: you effectively you get one hundred thousand dollars deminimus because

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Speaker 4: you're splitting that holding across across the two of.

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Speaker 1: You I'm an individual investor in Vision New zeal investor.

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Speaker 1: I have been investing off shore. The things I've been at,

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Speaker 1: the foreign investment funds I've investing in offshore aren't on

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Speaker 1: the AX exemption tool. I more that costs me more

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Speaker 1: than fifty thousand New Zealand dollars to buy these foreign

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Speaker 1: investment funds. What I do now, like, how do I

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Speaker 1: calculate my foreign investment fund income? How do I determine

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Speaker 1: the tax that I might need to pay?

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Speaker 4: Sure there's a there's a number of different fifth income

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Speaker 4: calculation methods, but by far and away the most too

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Speaker 4: common ones are the fear dividend rate method and the

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Speaker 4: comparative value method the CV methods, So FDR and CV

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Speaker 4: are the two key methods. Under the FDR method, you

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Speaker 4: basically you take five percent of your opening market value

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Speaker 4: of your fifth portfolio and take five percent of that

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Speaker 4: and that is your fifth income for the year. Now

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Speaker 4: that's the case irrespective of whether you're that that portfolio

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Speaker 4: might have returned fifteen percent that year, your kind of

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Speaker 4: income is kept at five percent. But in contrast, if

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Speaker 4: you know if it's a bad year and that portfolio

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Speaker 4: has made a loss or a gain of less than

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Speaker 4: five percent, you still have that deemed return of five

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Speaker 4: percent under the FDR method. There is a little rinkle

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Speaker 4: to the FDR method as well. If you happen to

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Speaker 4: be buying and selling fifths within an income year, then

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Speaker 4: there's something called a quick sale calculation. So if you

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Speaker 4: are doing that, there's a little bit of a complexity.

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Speaker 4: You just need to navigate where you need to calculate

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Speaker 4: the gain you make on that trade. But again is

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Speaker 4: a five percent cap, so you're a little bit of

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Speaker 4: a wrinkle if you are sort of trading within within

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Speaker 4: an income year.

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Speaker 1: Can I replay that one back to you? So the

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Speaker 1: FDR method our first method. At a high level, I

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Speaker 1: look at the value at the start of the period,

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Speaker 1: I multiply it by five percent, and that's my fifth

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Speaker 1: income correct.

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Speaker 4: The FDR method is available to all investors effectively, So

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Speaker 4: if you were a New Zealand listed pie, the New

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Speaker 4: Zealand listed pie would be applying those FDR rls to

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Speaker 4: calculate its return on interests that that vehicle might have

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Speaker 4: invested into as an individual or for certain trusts in

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Speaker 4: New Zealand. You also have the ability to use the

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Speaker 4: CV method under the CV method, It basically calculates the

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Speaker 4: market value movement of your portfolio for the year. So

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Speaker 4: and for what For most investors, what you would do

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Speaker 4: is calculate your income under FDR, calculate your income under CV,

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Speaker 4: and each year you have the option of choosing the

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Speaker 4: lower of those two. So in the scenario I described earlier,

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Speaker 4: where your portfolio had performed poorly, under FDR, you would

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Speaker 4: have a deemed return of five percent of the opening

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Speaker 4: market value, but under CV, your actual market value movement

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Speaker 4: was less than five percent, or in fact, if you

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Speaker 4: made a loss overall, then you'll pay tax on that

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Speaker 4: lower amount where it's where it's a loss, you don't

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Speaker 4: get to claim the loss, but you'll return NOL income

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Speaker 4: on your portfolio under the CV method. Just one last

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Speaker 4: thing I should say on that is that there is

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Speaker 4: a consistency requirement. So if you have you know you

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Speaker 4: need to use the same method for your fifths in

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Speaker 4: an income year. So you can't sort of choose you

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Speaker 4: CV for this loot over here because it suits you

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Speaker 4: and use FDR on this lot. You need to use

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Speaker 4: one method consistently within an income year, but you can

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Speaker 4: switch and change between FD FDR, and CV between different

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Speaker 4: income years, or.

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Speaker 1: The decision for most of our shares investors whether do

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Speaker 1: I want to go FDR or do I not to

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Speaker 1: g CV. So something that we actually offer shares investors

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Speaker 1: at the moment as a download or report, so it

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Speaker 1: gives the data or the inputs so they can do

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Speaker 1: the calculations to determine their ZV income or the FDR

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Speaker 1: method income. It's a downloadable sis the report or we

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Speaker 1: also offer a integration to share site plug in. We

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Speaker 1: share them a month of your trading data and it

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Speaker 1: prints out those two numbers and then you can make

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Speaker 1: that call about whether you want to use a CV

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Speaker 1: approach or the FDR approach. So summarizing going back through,

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Speaker 1: so we realize we're a fifth investor because we have

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Speaker 1: more than fift New Zealand dollars offshore. We've now done

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Speaker 1: our CV income, our FDR income, and we've decided that

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Speaker 1: we want to go with the FDR income approach. Let's say, so,

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Speaker 1: how do we go about paying text now that we

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Speaker 1: know this number? Hayden right.

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Speaker 3: So obviously the thing to do is to include the

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Speaker 3: fifth income in your income tax return, and so you

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Speaker 3: would go into my IR and load up the return

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Speaker 3: for the air and include your fifth income. When it

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Speaker 3: comes to fifth income, you may be entitled to claim

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Speaker 3: some tax credits against that income. For example, if you

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Speaker 3: receive a foreign dividend and the foreign country has withheld

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Speaker 3: withholding taxes, you'll be entitled to a foreign tax credit

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Speaker 3: in relation to your fifth income. But there are some

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Speaker 3: limitations in claiming foreign tax credits, so it's always good

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Speaker 3: to check the id guaridance to see if you're entitled

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Speaker 3: to the foreign tax credit and the amount you're entitled to. Then,

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Speaker 3: in addition, in relation to the dividend, Chazis may deduct

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Speaker 3: withholding tax and that's resident withholding tax from the dividend,

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Speaker 3: and you're entitled to claim a tax credit for that

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Speaker 3: resident withholding tax in your return as well. The difference

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Speaker 3: between a foreign tax credit, though, and the resident withholding

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Speaker 3: tax deducted by chair Zis is that resident withholding tax

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Speaker 3: is actually a refundable tax credit. So if it turns

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Speaker 3: out that the tax payable on your fifth income is

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Speaker 3: greater than the foreign tax credit and the RWT combined,

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Speaker 3: you'd be able to get a refund of the excess IRWT.

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Speaker 3: If I suppose you realize that you'd not return fifth

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Speaker 3: income in a prior year when you should have the

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Speaker 3: best thing to do then would be to write into

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Speaker 3: inland revenue, telling them about it and making what's called

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Speaker 3: a voluntary disclosure. And so again you can do that

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Speaker 3: through my IR by logging into the system and asking

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Speaker 3: in the revenue to adjust the return. And when you're

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Speaker 3: asking for an adjustment, it's really important to provide a

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Speaker 3: work paper explaining how you've culculated them out that you're

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Speaker 3: planning on adjusting to. And also to bear in mind

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Speaker 3: that you may have mistakenly included your dividend income and

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Speaker 3: your return by mistake, so you're not just asking to

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Speaker 3: include the fifth income, but you're also asking them to

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Speaker 3: take the dividend income out the return, and so there's

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Speaker 3: actually a need adjustment that you're asking for. So including

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Speaker 3: all that information and making the voluntary disclosures helpful.

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Speaker 1: There's a few things that remember in terms of types

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Speaker 1: of income. What happens with dividend income.

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Speaker 4: Well, yeah, under the FDR method, you don't look at

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Speaker 4: dividend income. Under the CV method, there is a formula.

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Speaker 4: So I said before that you're looking to work out

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Speaker 4: the market value movement on your portfolio. It's basically looking

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Speaker 4: at the overall economic return. So there's a CV formula

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Speaker 4: that you need to work through. Your dividends form part

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Speaker 4: of the gains for a particular year, so you would

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Speaker 4: need to look at that if you're applying the CV formula.

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Speaker 4: But one point to remember that with all of these methods,

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Speaker 4: So with the FDR method and the CV method, once

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Speaker 4: you've calculated your income for the year and returned to

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Speaker 4: that income to inland revenue, that that is the only

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Speaker 4: income that you need to return on those fifths. So

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Speaker 4: if you subsequently make a gain at a later date,

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Speaker 4: you will not be taxed on that gain. If you

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Speaker 4: subsequently receive a dividend, then you're not taxed on that.

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Speaker 4: You just have to return your fifth income under one

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Speaker 4: of those two methods each year, and that is that

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Speaker 4: is the only income that you need to return in

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Speaker 4: relation to those fifths.

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Speaker 1: Of investors out there, we're interested about how they're going

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Speaker 1: to be able to do these calculations. Is there any

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Speaker 1: kind of tools that you can point them to that

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Speaker 1: can help them with this process? Hayden, Yeah, sure.

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Speaker 3: So you've already mentioned the AX exemption tool. So that's

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Speaker 3: available in an n Revenues website just by googling asx

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Speaker 3: fifth exemption. There's also a fifth income calculator on a

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Speaker 3: THEN Revenues website which which can be helpful if you're

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Speaker 3: trying to work out both your fifth FDR income and

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Speaker 3: CV income and all that you need to use that

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Speaker 3: tool is your transaction details during the year. In addition,

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Speaker 3: there's also a Foreign Investment Fund income guide available on

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Speaker 3: the n THEN Revenue website that's called the IR four

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Speaker 3: six one, So you could google IR four six one

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Speaker 3: or IID Foreign Investment Fund Guide and both of those

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Speaker 3: searchers will pull up the guide for you.

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Speaker 1: Yeah, just for those the shares of investors out there,

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Speaker 1: we do provide the day on transaction history which can

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Speaker 1: be used to educate or to input into the IRR

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Speaker 1: fifth tool calculation tool. And as I mentioned before, we

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Speaker 1: have also had the Shares Share Sarte integration and they

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Speaker 1: can do the calculations for you. So we've got that

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Speaker 1: dry approach or you can outsource it. And I understand

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Speaker 1: you can do a one month fee for the share

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Speaker 1: site report as well, and from there my IR for

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Speaker 1: the submitting to the ID. So we have a lot

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Speaker 1: of investors on shares these that are already over the

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Speaker 1: fifty k threshold and will be sit under the fifth rules. However,

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Speaker 1: we also see a lot of investors that are growing

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Speaker 1: their portfolios and we'll be close to that fifty k

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Speaker 1: mark very soon. Ross what should they be thinking about?

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Speaker 4: You know, I guess it's important if you're close to

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Speaker 4: that fifty k mark to really just check and see

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Speaker 4: where you are at. If the cost of your fifths

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Speaker 4: exceeds or is fifty thousand dollars or more New Zealand

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Speaker 4: and any any point in the income year, then you

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Speaker 4: will be subject to the fifth rules. It is only

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Speaker 4: fifths that are subjects to rules that come within the

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Speaker 4: fifty thousand dollars you're measuring. If, for example, you have

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Speaker 4: investments in Australian listed stocks that are exempt, they don't

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Speaker 4: come into the fifty thousand dollars, so you can exclude those.

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Speaker 4: If you do, say, have fifths with a cost of

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Speaker 4: fifty two thousand dollars in a year, that means that

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Speaker 4: all of your fifths are going to be subject to

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Speaker 4: the fifth regime, don't You don't sort of get the

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Speaker 4: first fifty thousand dollars free if you're if you exceed

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Speaker 4: that fifty thousand dollars mark, then all of your fifths

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Speaker 4: will be taxed using the fifth regime in that year.

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Speaker 1: Just a local example, please, where have a lot lot

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Speaker 1: of investors that say invest in a smartch is SMP fund?

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Speaker 1: Would that be a fifth fund?

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Speaker 3: To work out whether a lot of fund is a

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Speaker 3: foreign investment fund, what you need to look at is

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Speaker 3: where the fund itself is resident. So my understanding is

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Speaker 3: the smart shares funds actually New Zealand resident funds, So

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Speaker 3: you're investing into a New Zealand entity, so the foreign

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Speaker 3: investment fund rules won't apply. It doesn't matter that the

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Speaker 3: fund is investing itself into foreign shares that that's not

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Speaker 3: what you're looking at. You look at where the fund

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Speaker 3: is resident.

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Speaker 1: Thank you both, really appreciate your time and thank you

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Speaker 1: from on behalf of our investors as well. Thank you.

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Speaker 1: Thanks once again. Tax is very individual and it's always

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Speaker 1: best to see tax advice from your accountant or advisor

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Speaker 1: if you're at all on shore. Martyr Wa