Interest Deduction against FIF income

[Snoopy]

Which one do you find unwise? Only investing in FIFs or the margin loan?

To try to be even handed about it, there is one potential advantage in your plan. On a bad FIF year it might be possible to claim an interest rate expense against your FIF investments even though from the IRD perspective you have made no income! I guess that would partially offset the disadvantage of having to pay tax on recovering your original capital in subsequent years.

I would say the worst part of your plan is the 100% margin loan. I believe the underlying investment (overseas shares, or for that matter any shares) is too volatile for this to work in the medium term. I would describe a 20% margin loan as extremely aggressive.

Think of it this way. All sharemarket listed entities have a responsibility to their shareholders to be 'capital efficient'. A well run company will borrow money to achieve this. What you are really saying by borrowing money to invest in shares is that you believe the underlying shares are not optimally 'capital efficient' and that you can borrow more money against the fixed income stream from the underlying share to achieve a better result. On rare occasions you might be right. But in the general case you are saying that you know more about how the underlying business than management do. To me this kind of thinking is a bad bet.

The FIF regime is I believe negative from an NZ investor return perspective. If you can find a high growth index included company for example in Australia (not subject to FIF) that is growing faster than some investment in the US (or whatever FIF country you care to substitute) from a post tax perspective you are likely to be better off by putting your money in that Australian company. To me it now makes sense to get international exposure by looking at NZ/Oz exporters (the are some locally listed companies that earn almost all of their income outside of NZ/Oz) rather than trying to buy into some FIF overseas growth story.

To be hypocritical I have made one FIF investment myself since FIF came in - YUM brands on the NYSE. But even that I would consider as fairly and fully priced for now. And I certainly haven't borrowed money to get into it. In general my eyes are cast firmly towards the NZX and ASX bourses these days.

SNOOPY