Tax implications of ETFs

[JonathanGiles]

Hi all,

I am new to this forum so here's hoping I follow the rules! I've been reading threads in this forum like a madman, but I still have a few questions.

I was hoping people might be able to help me fill in a gap in my knowledge about share trading. I'm 29, married with a 10-month old son, have a newly free-hold house (outside of Auckland), and both my wife and I are working full time in well-paying jobs. We have very low costs of living so are able to save quite effectively.

I've been dabbling with shares recently - I set up a E*Trade account (via their Hong Kong subsidiary) and bought a few shares in companies I like (so far, I've pretty much evened out - some nice gains offset by some ugly losses!). Now that I'm free-hold on my house I've been doing a lot more research. My general conclusion is that I like the look of ETFs - I don't have time to research the market, and I'm happy to be boring when it comes to growing our money.

I appear to have (at least) two options:

1) Buy US-based ETFs via E*Trade. My research has led me to VTI, VXUS, and BND as the likely ETF's that I would invest in in this scenario.
2) Buy NZ-based ETF's via smartshares (or an alternative).

The thing that gets me is the fees and tax calculations. I'm mildly intelligent, but my eyes blur over on tax and accountancy details :-)

With option 1, it seems to me that the ETF fees are miniscule (0.05% for VTI). Of course, I'm risking with the NZD -> USD conversion (but I'm comfortable with that, given my long-term view). The kicker appears to be FIF, and even though I can see a lot of discussion (and contention) on it, to me it seems at least mostly fair (even if you disagree with a capital gains tax on a non-realised capital gain). On the other side, it is entirely unclear to me if I will be taxed in the US, and this is primarily what worries me - I don't know how to determine my likely returns as I don't understand well-enough the tax implications of US-based ETFs.

On the other hand, the NZ-based ETFs have higher fees (0.60 - 0.75% it would seem), but I can ignore the hassle of complexity of international taxation!

I don't know if someone is able to help with an example, but what would be really informative is an example of the kind of maths involved with both options in an idealised case (e.g. $100,000 invested with 10% returns - what do I end up with in both cases)? I know general advice is to not go into a certain investment based on taxes (as they are likely to change over the long term), but I feel too uninformed to even know what is the best option for today.

I'm also (perhaps entirely naively) not a fan of NZ-based markets, just because I seem to think US-based markets are bigger, more exciting, and more likely to have greater growth than NZ-based markets. Can someone please tell me this is a stupid reason to avoid NZ?

Additionally, most advice seems to be to get the US-based ETFs via the ASX, rather than buying them in the US. Why is this?

In short, I'm looking for a place to grow my money over the long term. I am open to suggestions and advice, and would love to see someone clarify the upsides / downsides of options 1 and 2.

Thanks so much!
Jonathan Giles

[voltage]

Both options should be part of your plan. set percentage in your local home market and also in the global market. VXUS covers everything outside NZ. However there is an issue. Any global stock that is from the US or domiciled from the US will have estate duties apply for over $60000 invested if you are a non US resident. I have been researching this and find that investing globally is not that straight forward from NZ.
A good read about this is found at http://andrewhallam.com

[JonathanGiles]

Thanks voltage for your response. I'm assuming your VXUS comment was supposed to say 'everything outside US', rather than 'everything outside NZ'.

Your suggestion to go into both is smart - I guess I can do SmartShares FNZ, as well as my preferred VTI ETF.

I will need to research more about estate duties on overseas investments, as I know nothing about this aspect. If you have any further insights I'd love to hear them.

Thanks!

[JonathanGiles]

To follow up on the estate duties comment - am I right in assuming this is based on both my partner and I dying? Therefore, whilst it is of course never certain when one meets their maker, it would be wise to move money back out of the US ETFs as one approaches retirement age (which I am still far from doing). Are there implications I'm unaware of in terms of selling down ETFs and bringing the cash back to New Zealand? If by the time I'm dead and buried I have no financial interests in the US, have I effectively avoided the estate duties for my heirs?

[voltage]

Well the problem has been solved. Today vanguard has introduced an etf on the asx that is for the world index ex Australia. The MER is 0.18% and is domiciled in Australia with dividend reinvestment option. The index holds 62% us.

[voltage]

Well the problem has been solved. Today vanguard has introduced an etf on the asx that is for the world index ex Australia. The MER is 0.18% and is domiciled in Australia with dividend reinvestment option. The index holds 62% us. It's code is VGS.

[blackcap]

Well the problem has been solved. Today vanguard has introduced an etf on the asx that is for the world index ex Australia. The MER is 0.18% and is domiciled in Australia with dividend reinvestment option. The index holds 62% us.

Thanks for that bit of info voltage. I was inadvertently looking for such a product as I have a lot of my investments in Australia but do wish to diversify a bit more than that so this is perfect. The MER is not shabby either. I already hold a Vanguard product and like what they deliver.

[JonathanGiles]

Sorry for the stupid question, but why does this solve the problem? I know FIF has some exclusions - does it apply here? Or were you speaking to the estate duties issue?

Can you give more details of the new vanguard offering too, including its name and your recommended broker for trading it (I currently only have a Hong Kong ETrade account so will need something else here probably)? Thanks!

[voltage]

Still under FIF as any fund will be, us estate duties do not apply as is domiciled in the US, allows dividends to be reinvested. MER is low at 0.18%. There are a number of Australian discount brokers who have fees down to 0.1% but will probably use an nz broker since I trade nz and asx stock where fee is 0.3%

[voltage]

Correction for above statement, should be us estate duties do not apply as it is not domiciled in the US but Australia. Also SPDR has a similar ETF on the ASX but has an MER of 0.42.%