Is there any tax advantage of direct NZ Shares vs an NZ Share Managed Investment fund

[xlinknz]

I have both direct shares and also a similar amount in a managed NZ Share Fund (and a Growth fund)

Is there any tax advantage of direct NZ Shares vs an NZ Managed Investment fund based on NZX50 shares

[Snoopy]

I have both direct shares and also a similar amount in a managed NZ Share Fund (and a Growth fund)

Is there any tax advantage of direct NZ Shares vs an NZ Managed Investment fund based on NZX50 shares.


No tax advantage with direct ownership of NZ shares verses owning those same shares in a managed fund that I am aware of. I add the caveat that I don't know exactly how all the managed funds investing in NZ shares operate. If some go for trading profits for part of their fund, then you might end up paying 'traders' tax rates as a fund 'investor'. That is about the only regulatory disadvantage that I can think of.

There may be some timing advantages. If you own shares in your own name, then you can sell on your own timetable if you feel so inclined. Some traders on here sell at a loss to minimize a particular year's tax bill. A fund would not do that for you.

Another potential advantage of individual share ownership could be if you get your tax deduction rate wrong on dividend payments for example, you should be able to claim overpaid tax back by filing a tax return. But if you get your PIE tax rate wrong with a fund you invest in, then there is no way to claw back your overpaid tax.

The disadvantage of going through a fund is that you pay fund management fees which you would not pay if you owned those shares individually. But that is not a tax issue.

SNOOPY

[CJ]

If you are in a PIE fund, top tax rate is 28% compared to upto 39% if held personally. YOu would need to check if the fund is also taxed on its capital gains as that would then be a disadvantage.

[xlinknz]

Thank you @snoopy and @CJ for your replies :)

One managed fund provider (Superlife) confirmed to me that with their share based managed funds only my dividends are taxed at ones PIR and not the capital gain one gets on the fund.

It seems many managed fund providers and indeed even the likes of Sharsies and Hatch etc are reluctant to clearly state only dividends are taxed. Maybe they didn't want to draw undue attention to no tax on capital gains? :laugh:

To their credit managed Fund provider Milford Asset do state here (https://milfordasset.com/new-to-investing/faq) that their funds are all registered PIE entities and as a result benefit from "No tax on gains in New Zealand shares and certain Australian shares"

[nztx]

One advantage I can see with direct share ownership could occur if the holder of the shares has unutilised ceiling
room between their annual income total & the level that 33% rate applies (viz over $70k annualised income)

Generally all dividends in NZ are required to see tax imputation credits and/or div withholding tax amounting
in aggregate to 33% of the gross dividend. If no imputation credits then 33% DWT deducted at source.

(the max imputation credit rate currently is 28% & DWT a further 5% out of cash dividend)

(The old Qualifying Companies regime still has no requirement for 5% DWT - but this doesn't apply
to listed companies investments)


Looking at the tax bands now (using 2020 year) -

- $14k - $48k Gross = 17.5% tax rate for that income band
- $48k - $70k Gross = 30.0% tax rate for that income band


Dividends taxed in $14k - $48k Annual Income level @ 17.5% may see an effective tax credit of 15.5% on dividend portion of income
- either reducing tax payable or refundable once return is filed

In the $48k - $70k Annual Income level @ 30% may see a tax credit of 3.0% - offset against other tax payable or refundable

Many funds may be set up as Pie funds - so capable of varying PIR rates applied by a holder

A correct PIR rate used with these funds will see net after tax invested in the fund

Owning the shares personally sees any tax differentials refunded / offset directly back to shareholder via the tax system

[SBQ]

One advantage I can see with direct share ownership could occur if the holder of the shares has unutilised ceiling
room between their annual income total & the level that 33% rate applies (viz over $70k annualised income)

Generally all dividends in NZ are required to see tax imputation credits and/or div withholding tax amounting
in aggregate to 33% of the gross dividend. If no imputation credits then 33% DWT deducted at source.

(the max imputation credit rate currently is 28% & DWT a further 5% out of cash dividend)

(The old Qualifying Companies regime still has no requirement for 5% DWT - but this doesn't apply
to listed companies investments)


Looking at the tax bands now (using 2020 year) -

- $14k - $48k Gross = 17.5% tax rate for that income band
- $48k - $70k Gross = 30.0% tax rate for that income band


Dividends taxed in $14k - $48k Annual Income level @ 17.5% may see an effective tax credit of 15.5% on dividend portion of income
- either reducing tax payable or refundable once return is filed

In the $48k - $70k Annual Income level @ 30% may see a tax credit of 3.0% - offset against other tax payable or refundable

Many funds may be set up as Pie funds - so capable of varying PIR rates applied by a holder

A correct PIR rate used with these funds will see net after tax invested in the fund

Owning the shares personally sees any tax differentials refunded / offset directly back to shareholder via the tax system

Still a far cry on the dividend tax credit scheme if the listed NZ company would retain the profits through 'retained shareholder earnings' on the balance sheet. The book value per share increases and thus, the share price will increase. The shareholder gets the benefit of tax free capital gains if they choose to sell a portion of their shares.

Anotherwords from a net tax point of view, it's always better to have a tax free capital gain than an expectation for dividend payment. In my books, I want to elect an income WHEN I want to, instead of letting the company year after year, subscribe to a dividend payment plan that has tax implication. This is the key reason why Warren Buffet never pays a dividend because the shareholder is most likely worse off, with the cash dividend payment (in trying to reinvest it elsewhere).