FIF question: Selling shares to stay under threshold?

[Pump]

My understanding of the FIF threshold is that the total cost of foreign investments has to be 50k or less to not be taxed.

So lets say I want to keep my threshold under so I purchase 50k of foreign share A. One year later I decide I want to reduce my position in share A and purchase new foreign share B.

Am I able to stay under the threshold by selling 25k of share A and purchasing 25k of share B?

What if the total value of share A is now 100k, can I still do the same thing and remain under the threshold (sell 25k worth of share A and invest 25k elsewhere)? How about selling 50k worth, would that mean the total cost is 0 so it is no longer counted at all?

Thanks, hopefully I explained that well enough.

[scottwalshnz]

How about selling 50k worth, would that mean the total cost is 0 so it is no longer counted at all?


If sell a bunch of shares that cost you 50k, they rise to 100k and you sell 1/2 for 50k, the remaining shares still cost you something (25k).

I haven't looked into FIF closely, but it appears the cost is calculated on a FIFO basis, unless it is subject to the quick sale rule. Ref: https://www.ird.govt.nz/technical-tax/legislation/2007/2007-109/2007-109-portfolio-entity/

I'm not a tax expert, so would suggest seek professional advise if you are unclear.

[G on]

Have a look at what constitutes as an FIF company to get a clearer idea of what you add up. When I talked to IRD companies that are not FIF classed aren't included in the total but if you go over the NZD$50,000.00 of FIF companies ALL your overseas shares are added to the mix. Great system huh!
Plenty of info here about it but the IRD website does have a good explanation about it.

[Pump]

If sell a bunch of shares that cost you 50k, they rise to 100k and you sell 1/2 for 50k, the remaining shares still cost you something (25k).

I haven't looked into FIF closely, but it appears the cost is calculated on a FIFO basis, unless it is subject to the quick sale rule. Ref: https://www.ird.govt.nz/technical-tax/legislation/2007/2007-109/2007-109-portfolio-entity/

I'm not a tax expert, so would suggest seek professional advise if you are unclear.

Thanks I think I understand it better now. Before I wasn't thinking of selling the shares as individual units. So if you purchased 100 shares for 50k and sold 50 then your investment cost would be 25k, regardless of the current price.

[Snoopy]

My understanding of the FIF threshold is that the total cost of foreign investments has to be 50k or less to not be taxed.

So lets say I want to keep my threshold under so I purchase 50k of foreign share A. One year later I decide I want to reduce my position in share A and purchase new foreign share B.

Am I able to stay under the threshold by selling 25k of share A and purchasing 25k of share B?


Yes



What if the total value of share A is now 100k, can I still do the same thing and remain under the threshold (sell 25k worth of share A and invest 25k elsewhere)?


Yes



How about selling 50k worth, would that mean the total cost is 0 so it is no longer counted at all?


The FIF regime threshold balance works on the purchase price of shares. So if you paid 50k for those shares and sold them for 50k then your FIF balance is extinguished providing these were the only FIF shares you owned. If however, the shares had doubled in value over the year that you owned them, then selling 50k worth would only be selling half your shares. So your FIF balance for tax calculation threshold purposes would be 25k (the purchase price of the shares you didn't sell).



Thanks, hopefully I explained that well enough.


Pump, as a 'user' (cough, cough) of the FIF regime since its inception, I can confirm your above post is almost completely correct. The only points I would make in clarification are that:

1/ 'foreign shares' should more correctly be described as shares which do not have either an NZ imputation credit or an Australian franking credit account. Most Australian shares that in common parlance could still be described as 'foreign' are exempt from the FIF regime. Because of this, a share that is listed in New Zealand - but doesn't make any profits in NZ - could still fall under the FIF rules.
2/ Shares that fall outside the FIF regime are still taxed. But they are taxed according to the way your usual NZ share investments are taxed (on dividends only).
3/ If an FIF regime share has a very high dividend yield, you will likely pay less tax under the FIF regime than you would if that same share was taxed under NZ sharemarket tax rules. IOW the FIF regime is not necessarily always bad and something to be avoided.

SNOOPY

[drew]

To add to this discussion, calculation of "cost" should be on a LIFO (last in first out) basis. Only use FIFO if LIFO or average cost is not feasible.

[iced]

How are ASX listed ETFs treated?

[blackcap]

How are ASX listed ETFs treated?

That is a question I am also very interested in...

[scottwalshnz]

To add to this discussion, calculation of "cost" should be on a LIFO (last in first out) basis. Only use FIFO if LIFO or average cost is not feasible.

Based on EX68(2) of the Income Tax Act, I thought cost should be calculated using FIFO unless you can specific identity the cost, or the quick sale rules apply (quick sale rules use LIFO).

[scottwalshnz]

How are ASX listed ETFs treated?

IRD keep a list: http://www.ird.govt.nz/calculators/tool-name/tools-a/toii-fif-list-aust-share-exemption-2015.html
It excludes LICs, are the ETFs you're interested in a LIC?

[voltage]

I am confused here, LIC like Argo are exempt but Vanguards index fund that also invests in the 300 ASX index is not.

[blackcap]

I have had a thought about this ridiculous bureaucratic nonsense that is FIF. But could you get past this extra tax paying loophole by setting up separate entities (limited or look through companies) and allocate $50,000 to each? Ie you have a portfolio of $500,000 so split this up into CoyA, CoyB, CoyC.... etc. Annual fees of $450 to keep the companies office happy and a bit of DIY accounting (10 IR4 returns, how hard can it be on a holding company) and that sure beats paying tax on $25,000 of "deemed income",

Thoughts welcome.

(I have ignored the one off cost of setting up the company)

[scottwalshnz]

I have had a thought about this ridiculous bureaucratic nonsense that is FIF. But could you get past this extra tax paying loophole by setting up separate entities (limited or look through companies) and allocate $50,000 to each? Ie you have a portfolio of $500,000 so split this up into CoyA, CoyB, CoyC.... etc. Annual fees of $450 to keep the companies office happy and a bit of DIY accounting (10 IR4 returns, how hard can it be on a holding company) and that sure beats paying tax on $25,000 of "deemed income",

Thoughts welcome.

(I have ignored the one off cost of setting up the company)

CQ 5(1)(d) "if the person is a natural person and not acting as a trustee"

A company is not a natural person. The de minimis limit doesn't apply to companies.

[blackcap]

CQ 5(1)(d) "if the person is a natural person and not acting as a trustee"

A company is not a natural person. The de minimis limit doesn't apply to companies.

You mean to say I should have been paying FIF tax on the $10,000 odd of Aussie investments a company I control owns? Oops...

[scottwalshnz]

You mean to say I should have been paying FIF tax on the $10,000 odd of Aussie investments a company I control owns? Oops...


If they aren't exempt stock, that would be my take. I'm no expert, I just went and read the act.

[blackcap]

If they aren't exempt stock, that would be my take. I'm no expert, I just went and read the act.

Cheers scottwalshnz, I call a terrible indictment on the IRD here. How are ordinary business and companies supposed to know their obligations in this regard when I who have an interest in the markets, knew about FIF (just presumed the 50K applied to all and sundry) still did not know of this obligation? I know ignorance of the law is no defence but surely there should have been better communication at the time? How many NZ companies have investments overseas I wonder and are unaware of their obligations as they stand.....

[777]

The de minimis does not apply to trusts either.

This was all quite clearly explained at the introduction of the FIF regime but I am sure many have not accounted for it correctly.

[scottwalshnz]

Cheers scottwalshnz, I call a terrible indictment on the IRD here. How are ordinary business and companies supposed to know their obligations in this regard when I who have an interest in the markets, knew about FIF (just presumed the 50K applied to all and sundry) still did not know of this obligation? I know ignorance of the law is no defence but surely there should have been better communication at the time? How many NZ companies have investments overseas I wonder and are unaware of their obligations as they stand.....

I think they have tried to communicate the obligations, maybe it could be better, but they have attempted to get the information out.

http://www.ird.govt.nz/toii/fif/how-taxed/how-tax-threshold/toii-fif-how-taxed-50000-threshold.html

They do have a guide on the subject, I think it needs to be clearer in places: http://www.ird.govt.nz/forms-guides/number/forms-400-499/ir461-guide-fif-fair-dividend-rate.html
Plus the guide on completing an IR4 for your Company Tax return does mention it too: http://www.ird.govt.nz/forms-guides/number/forms-001-99/ir004gu-guide-companytaxguide-2013.html (found the 2013 one first)

[blackcap]

I think they have tried to communicate the obligations, maybe it could be better, but they have attempted to get the information out.

http://www.ird.govt.nz/toii/fif/how-taxed/how-tax-threshold/toii-fif-how-taxed-50000-threshold.html

They do have a guide on the subject, I think it needs to be clearer in places: http://www.ird.govt.nz/forms-guides/number/forms-400-499/ir461-guide-fif-fair-dividend-rate.html
Plus the guide on completing an IR4 for your Company Tax return does mention it too: http://www.ird.govt.nz/forms-guides/number/forms-001-99/ir004gu-guide-companytaxguide-2013.html (found the 2013 one first)

Thanks, have had a good read...

So following this logic, I am better off "gifting" my brother in Australia a whole heap of cash and he can "invest" in the Australian stock market, making use of the franking credits and I not have to worry about the FIF. A win-win situation?

[Harvey Specter]

Thanks, have had a good read...

So following this logic, I am better off "gifting" my brother in Australia a whole heap of cash and he can "invest" in the Australian stock market, making use of the franking credits and I not have to worry about the FIF. A win-win situation?Definitely a Win for your Brother if he decides not to 'gift' it back.

[blackcap]

Definitely a Win for your Brother if he decides not to 'gift' it back.

Haha yes indeed... there is that inherent risk involved there as well.... :) But I trust him!

[audiav]

In practical terms, after reading numerous FIF threads on here, I take this to mean I can buy 50K of e.g. Vanguard total market index ETF on the ASX and sit on it for eternity and as long as I never purchase any other share outside of the IRD approved list, I will never have to pay any FIF tax on the holding except tax on dividends (if any)?

[777]

In practical terms, after reading numerous FIF threads on here, I take this to mean I can buy 50K of e.g. Vanguard total market index ETF on the ASX and sit on it for eternity and as long as I never purchase any other share outside of the IRD approved list, I will never have to pay any FIF tax on the holding except tax on dividends (if any)?

Re investment of distributions would be counted as adding to your $50,000. You would need to take the cash option.

[voltage]

But if the value increases over $50000 in the following tax year, FIF is triggered

[777]

But if the value increases over $50000 in the following tax year, FIF is triggered


Not so. It is cost price that is used.

Reinvesting distributions would be a purchase thus adding to the original investment that may, will in time, take you above the $50,000.

[audiav]

Cost price was how I interpreted it from IRD website, but needed a second opinion :t_up: