PDA

View Full Version : New Overseas Tax Rules - Worked sample problem



Snoopy
13-04-2006, 12:01 PM
Now that we know what the new tax rules are, I have gone back to the sample problem that I introduced on the 'Proposed tax rule on overseas investments’ thread. There is a sample problem produced in the official IRD policy documentation introducing the new legislation. But this problem is far too simplistic to get an idea of how these new tax rules will work in practice over many years. My own sample problem is also simplified. That’s because I am only considering one overseas company, not the basket of overseas companies that will need to be considered together by most investors hit by this new regime.

Nevertheless these calculations will only need to be performed once – on an individual investor’s summary collective position. So I don’t expect any real case to be significantly conceptually more difficult than the example presented here. Please note that any reference to ‘overseas shares’ means ‘ overseas shares excluding Australian’ in this context of this example..

My problem follows the fortune of ‘Ms Investor’. Let’s call her ‘I’

I'll rework my sample problem to see where 'I' ends up under the about to legislated tax rules.

SNOOPY

PS I've read the press releases put out by IRD. I am fairly sure the sample calculation I am going to present to you is correct, but being a dog I can make mistakes. If you spot one please feel free to highlight it to me!

Snoopy
13-04-2006, 12:42 PM
Problem Part 1 for FY2001 (April 2005 amendment)

I have some historic figures for YUM, the US parent company for Restaurant Brands KFC and Pizza Hut brands. Let's assume that this new tax regime applied from FY2001 and see what would have happened.

Let's assume 'I' bought 100 shares (we'll keep everything in round numbers) in December 2000 for $US34.655 dollars per share at an exchange rate of $NZ1= US42.32c. Brokerage was $US51.99. The shares paid no dividend in the time ‘I’ held them up until 31st March 2001, at which time the share price had increased to $US38.19. And the exchange rate changed to $NZ1= US42.19c. How much tax does ‘I’ pay on these shares for FY2001?

(All the above information carries over directly to this updated problem. Updated that is by the now published tax regime, nothing else.)

Using (A+B)-(C+D):

Where:
A is the market value of the unit-holding at the end of the income year.
B is the aggregate of all gains (e.g. capital returns) derived from holding or disposing of the interest during the income year (excluding dividends)
C is the market value of the unit-holding at the end of the previous income year; and
D is the total expenditure incurred by the holder during the income year in acquiring or increasing the interest.

(3819/0.4219 + 0) - (0+ (51.99/0.4232 + 3465.5/0.4232))= $NZ740.26

'Deemed Assessable Income' is the maximum of the dividend received (nil) and 0.05xC which is also nil (since I didn't own the shares at the start of the financial year), so no tax is payable at the end of FY2001 (March 31st 2001).
However, the amount 'available to tax' is deemed to be 85% of the capital gain of $NZ740.26.

0.85x$NZ740.26= $629.22

This figure becomes a figure 'E' (deferred income taxable) for the next tax year.


(continued)

SNOOPY

Snoopy
13-04-2006, 12:43 PM
Problem Part 2 (Apr2005 Amendment)

It is now the end of FY2002. ‘Yum Restaurants International’ paid no dividends during the entire year. ‘I’ didn't buy or sell any shares during the year and the share price improved to $US58.78 based on an exchange rate (at 31st March 2002) of $NZ1= US43.06c. How much tax does ‘I’ pay for FY2002?

Using our formula (A+B)-(C+D) to work out the change in share valuation over the year:

(5878/0.4306+ 0) - (3819/0.4219 + 0) = $NZ4598.81

From part 1 of the problem, the deferred income taxable is ‘E’ =$NZ 629.22

Again there is no dividend paid, so the deemed assessable income from FY2002 is by default

0.05xC = 0.05 x (3819/0.4219)= $NZ452.60

Assuming a 33% tax rate, that means the tax payable is 0.33x $NZ452.60= $NZ149.36.

We have now paid tax on $NZ452.60 of notional 'income', so the amount of 'deemed assessable income' for FY2002 is reduced to:

(0.85x$NZ4598.81)-$NZ452.60= $NZ3,456.39. We must add to this figure the untaxed notional income accumulated in previous years of $NZ629.22. Thus

$NZ3,456.39+ $NZ629.22= $NZ4,085.61

becomes the new 'E' for FY2003.


(continued)

SNOOPY

Snoopy
13-04-2006, 12:45 PM
Problem Part 3 (Apr2005 Amendment)

We have now rolled forwards to FY2003, and Mr. Market has thrown in a couple of curved balls. On 30th September 2002 there was a 1:1 share split. As at 31st March 2003 the YUM share price was $US24.33 and the exchange rate on that date was $NZ1= 55.12c. But instead of owning 100 shares 'I' now owns 200 (due to the share split). Once again no dividend was paid during the year.

The estimate of tax to pay based on deemed assessable income is based on a fixed multiple of the capital you have at the start of the year, *no matter what the actual performance of the share during the year*.

0.05x(5,878/0.4306)= $NZ682.53 x 0.33 (assuming 33% tax rate)= $NZ225.24

So $NZ225.24 is the minimum down payment of tax to pay for FY2003.

The 1:1 share split ends up being a bit of a red herring because the proposed tax system is based on the total market value of the shares held - not the share price.

Even though the number of shares ‘I’ owns has doubled, the share price has halved (at least theoretically) to take account of the fact that twice as many ordinary shares exist as did before the split.

So the value of ‘I’ shareholding at the end of FY2003 is:

200 x $US24.33 = $US4866.00

Using the (A+B)-(C+D) formula to calculate the annual change in share value, we get:

(4866/0.5512+ 0)-(5878/0.4306 + 0)= -$NZ4822.71

Whether this amount is positive or negative, it is still subject to the adjustment factor of 0.85

That means the incremental ‘available to tax’ amount is:

-$NZ4822.71x0.85=-$NZ4,099.30

The deferred tax increment is negative for this year – a loss. If we add that to the available to tax increment ‘E’ carried forward from previous years we get:

$NZ4,085.61-$NZ4,099.30=-$NZ13.69

The available to tax amount is -$NZ13.69 which *is* negative. So that means ‘I’ can declare a loss (which may be offset against other overseas income in a real case) for the year. Back to our example, assuming this is representative of the only overseas income ‘I’ have, then the government allows a loss up to the deemed percentage that would have been taxable (again, 5%) if a gain had been made instead.

That means the maximum loss that ‘I’ can claim *under any circumstances* is $NZ682.53.

However, in this instance the actual loss I have made is only $NZ13.69 (The loss during the year is much greater but we must take into account the untaxed gains ‘I’ have been storing from previous years). That means the full amount I can claim as a loss is $NZ13.69.

In this particular example we shall assume there is no other overseas income to offset against this $NZ13.69 loss. That means the figure of -$NZ13.69 (note the minus sign) is carried forward as our ‘E’ into the next financial year.


(continued)

SNOOPY

Snoopy
13-04-2006, 01:27 PM
Problem Part 4 (Apr2005 Amendment)

It is now the end of FY2004. Again ‘I’ hasn’t bought or sold any shares and no dividends have been paid to her. The share price is now $US37.99 and the exchange rate is $NZ1= 65.75c. What is the tax liability for ‘I’ in FY2004?

As at 31st March 2003 (start of the FY2004 financial year) the ‘Yum Restaurants International’ share price was $US24.33 and the exchange rate on that date was $NZ1 = 55.12c. That means the 'deemed assessable income' is as follows:

0.05x(200x$US24.33/0.5512)= $NZ441.40
x 0.33 (assuming 33% tax rate)= $NZ145.66

Now using (A+B)-(C+D), we can see how this investment changed in value during the year.

(200x37.99)/0.6575 + 0)-(200x24.33)/0.5512 +0) = $NZ2,701.14

That means the deferred tax increment is: 0.85 x $NZ2701.14 = $NZ2,295.97

And the total deferred tax amount ‘E’ is -$NZ13.69 +$NZ2,295.97= $NZ2,282.28

The total deferred tax liability is greater than the 'deemed assessable income' of $NZ441.40. That means we only have to pay tax immediately on the amount $NZ441.40. The amount of tax ‘I’ has to pay for FY2004 is $NZ145.66 (as just calculated).

The revised ‘deferred income to tax’ figure 'E' for the next financial year is calculated as follows:

$NZ2,282.28 -$NZ441.40 = $NZ1,840.88


(continued)

SNOOPY

Snoopy
13-04-2006, 01:28 PM
Problem Part 5 (Apr2005 Amendment)

The share price was $US37.99 and the exchange rate is $1US=65.75c at the end of FY2004. At the end of FY2005 the share price was $US51.81 and the exchange rate was $1US=70.70c

During FY2005 ‘Yum Restaurants International’ started paying dividends for the first time.
These dividends were at the rate of 10c per share, making a gross total of $20 per dividend payment. Withholding tax was deducted at a rate of 15%. That works out at $3 per dividend payment, leaving a net return of $17. Dividends were paid on three dates during FY2005. These dates accompanied by the $NZ/$US exchange rate on the day follow:

Div payment date 1: 6th August 2004; $NZ1=US64.47c
Div payment date 2: 5th November 2004; $NZ1=US69.05c
Div payment date 3: 4th February 2005; $NZ1=US71.02c

Once again ‘I’ makes no further share purchases or share sales during the year. What is ‘I’ tax liability for FY2005, due to owning these ‘Yum Restaurants International’ shares?

'Deemed assessable income' is the maximum of either (a) the dividend income or (b) the amount calculated using the capital appreciation formula

(a) Total gross dividend income, including all withholding tax is:
(20/0.6447 + 20/0.6905 + 20/0.7102)= $NZ88.15

(b) 0.05x(200x$US37.99/0.6575)= $NZ577.79

Clearly (b) is the larger, so this is our 'deemed assessable income'.

Now using (A+B)-(C+D), we can see how our investment changed in valuation during the year.

((200x51.81)/0.7070+0)-((200x37.99)/0.6575+ 0)= $NZ3,100.40

From this we can calculate the deferred untaxed income increment for FY2005, remembering to add in the summary dividend payment:

0.85x $NZ3,100.40+$NZ88.15 = $NZ2,723.49

And therefore the total accumulated deferred income going out of FY2005 is:

$NZ2,723.49 + $NZ1,840.88 = $NZ4,564.37


‘I’ has a deferred future untaxed income balance greater than the 'deemed assessable income' of $NZ577.79. That means ‘I’ only has to pay tax immediately on $NZ577.79. The amount of tax ‘I’ has to pay for FY2005, assuming a 33% tax rate, is:

$NZ577.79 x 0.33= $NZ190.67.

However, some US withholding tax - that is recognized in NZ as part of a dual taxation agreement has already been paid, specifically:

(3/0.6447 + 3/0.6905 + 3/0.7102)= $NZ13.22

That leaves the net amount of tax to pay as:

$190.67-$13.22=$177.45

The amount of future assessable income can now be reduced by the amount of income that has just been taxed.

$NZ4,564.37 - $NZ577.79 = $NZ3,986.50

This is the 'E' value that ‘I’ needs to carry forward for tax purposes in FY2006.

It can also be thought of as the residual income for a future tax liability hanging over your head as a taxpayer!

(end of sample method 1)

SNOOPY

Deev8
14-04-2006, 01:38 PM
quote:Originally posted by Snoopy

... but being a dog I can make mistakes. If you spot one please feel free to highlight it to me!


I agree up to March 2003.

At that point I agree that tax will be payable on deemed income of NZ$682.53, so NZ$225.24 of tax will be paid assuming a rate of 33%.

I also agree that the change in capital value over the year has been minus NZ$4822.71. Multiply that by 0.85 and add to it the NZ$4,085.61 carried forward from the previous year, and I agree that the running total of taxable income is minus NZ$13.69.

Where I departed from your figures was in the calculation of deferred taxable income to be carried forward.

As tax has been paid on NZ$682.53, I carried forward minus NZ$13.69 less NZ$682.53 - a carry forward of minus NZ$642.22.

However I know that I am as likely to be wrong as any dog, probably more likely!

Tim
14-04-2006, 08:25 PM
Thanks Snoopy for the work you have done, but isnt this you capital gains tax ridiculus. I will move to a very overweight position in my portfolio of Aussi stocks and choose ones that primarily invest in overseas companies like Rinker, Brambles,etc. If I have to pay tax on my other overseas portfolio I will hide it overseas or I will never sell and pay just 5% per year

Snoopy
17-04-2006, 09:01 PM
quote:Originally posted by Deev8



I agree up to March 2003.


Deev8, before I give my response, I would like to say that I very much appreciate you reading the nitty gritty of my example.

Certainly I don't think the example(s) given in the most recent ird policy discussion document is adequate in explaining the 'real' calculations that will be faced by most people over the coming years. It is only through in depth responses such as yours that we will all get to the bottom of how these calculations are done.

To clear up any possible ambiguity, given the other figures you have quoted, we are talking about the third part of my reworked problem:

Problem Part 3 (Apr2005 Amendment)


quote:
At that point I agree that tax will be payable on deemed income of NZ$682.53, so NZ$225.24 of tax will be paid assuming a rate of 33%.


My words were "estimate of tax to pay",

not a definitive

"(the amount on which) tax will be payable."


quote:
I also agree that the change in capital value over the year has been minus NZ$4822.71. Multiply that by 0.85 and add to it the NZ$4,085.61 carried forward from the previous year, and I agree that the running total of taxable income is minus NZ$13.69.


OK


quote:
Where I departed from your figures was in the calculation of deferred taxable income to be carried forward.

As tax has been paid on NZ$682.53, I carried forward minus NZ$13.69 less NZ$682.53 - a carry forward of minus NZ$642.22.


Deev8, something has happened to your arithmetic here.

By my calculator

-$NZ13.69 - $NZ682.53 = -$NZ696.22

Or am I misinterpreting what you are trying to do?

Nevertheless your comments have a conceptual 'ring of truth' about them.

Let's look at a slightly different problem (different in term of the timing of the investment only, all other numbers remain the same).

Let's say the inital investment was made on the first day of FY2003 (1st April 2002) and your task is to find the tax payable as at the last day of FY2003 (31st March 2003)

I have previously said:

"So the value of ‘I’ shareholding at the end of FY2003 is:

200 x $US24.33 = $US4866.00

Using the (A+B)-(C+D) formula to calculate the annual change in share value, we get:

(4866/0.5512+ 0)-(5878/0.4306 + 0)= -$NZ4822.71"

In this 'start the investment in FY2003' sub-case, our investor has clearly lost 'big-time'. 85% of this 'big-time' loss is:

0.85 x -$NZ4822.71= -$NZ4,099.30

However, the amount of the loss claimed cannot exceed 5% of the opening balance or:

0.05x(5,878/0.4306)= -$NZ682.53

That means I *can* declare a loss of $NZ682.53 on my overseas investment portfolio, AND I can carry forward an amount of my loss into the next tax year of:

-$NZ4,099.30 - -$NZ682.53= -$NZ3,416.77

Am I making sense so far?

HOWEVER, let us return to the example in which you found the alleged error. I agree that if tax has been paid on $NZ682.53, then you have a point.

But *does* tax have to be paid on $NZ682.53? I am arguing that because of the timing of the original purchases, in financial year 2001 - and the consequent downstream effect that a cumulative loss of -$NZ13.69 has accrued - it does not. Do you agree or disagree?

SNOOPY

Snoopy
18-04-2006, 10:34 AM
quote:Originally posted by Snoopy



Certainly I don't think the example(s) given in the most recent ird policy discussion document is adequate in explaining the 'real' calculations that will be faced by most people over the coming years.

<snip>

I agree that if tax has been paid on $NZ682.53, then you have a point.

But *does* tax have to be paid on $NZ682.53? I am arguing that because of the timing of the original purchases, in financial year 2001 - and the consequent downstream effect that a cumulative loss of -$NZ13.69 has accrued - it does not. Do you agree or disagree?


And just to give you the reference where I got my ideas from, I refer you back to the investment income discussion document issued in the middle of 2005.

www.taxpolicy.ird.govt.nz/publications/files/invincomedd.pdf

Under paragraph 5.60,

"Treatment of losses

5.60 Losses would be allowed under the proposed approach. A loss would arise if the “available to tax” amount were negative. The government proposes to allow a loss up to the deemed percentage that would have been taxable (again, 6% (edit-now 5%)) if a gain had been made instead. Also, when the proposed approach applies in the context of a pool of offshore assets, and a portion of the assets is realised, any negative “available to tax“ amount would be available as a loss in proportion to the ratio of the realisation to the market value of the pool at the time. The full loss would be allowed when the pool is realised."

I'll give the disclaimer that this is/was a discussion document and as such it has no legal standing. The views expressed in this 'invincomedd.pdf' document may not even co-incide with the views that the IRD have now. Neverthless it is the most complete information on the IRD thinking of how to deal with losses that I know of.

The specific words that caught my attention were:

"any negative “available to tax“ amount would be available as a loss in proportion to the ratio of the realisation to the market value of the pool at the time."

That's why I only carried forward the -$NZ13.69 as the loss to be carried forward beyond FY2003. -$NZ13.69 is the equivalent of the 'available to tax' (although I don't like that term) amount in the investment income discussion document. No mention is made in the reference paragraph of the equivalent NZ$682.53 'downpayment' proxy taxable income amount.

This is my own interpretation of the literature out there. I still could be wrong.

SNOOPY

Snoopy
19-04-2006, 11:06 AM
I thought it might be informative if I presented my sample problem in graphical form. It is telling to compare the original discussion document proposal with the draft legislative proposal.

http://img.villagephotos.com/p/2005-3/963787/GTaltTax.gif

There are a couple of points worth clarifying that are not entirely obvious from the diagram.

The 'total tax dollars' is the total tax dollar liability incurred over the five year period over which the shares are held. To get this total, we add the total tax downpayments made for years FY2001 to FY2005 to the residual income tax due in the final year only - FY2005.

It is rather interesting to observe that the tax positions are significantly different between the two proposals in the first two years. Yet towards the end of the five year period the tax bar mountains take on a surprisingly similar shape. At first I thought that I must have made a mistake. Looking at the numbers, the tax due after five years under the proposed legislation is 95% of that due under the draconian discussion document proposal! That's odd when I was expecting nearer a 15% difference (due to the capital gains tax component being reduced from 100% of gains to 85% of gains), not a 5% difference!

However, on reflection I don't think I have made an error. The rather unexpected small difference is because the 'downpayment of tax' is reduced under the proposed legislation. Perversely because the downpayment required is reduced, more money is left in the hands of the taxpayer. The taxpayer then uses that extra money not only to produce more capital gain for themselves, but -by association- more capital gains tax for the government! It is quite probable that if this example was extended further out in the future, then the reduced up front tax take will result in *more* total tax income for the government, even though the capital gains tax rate has been reduced!

Finally I have added to both graphs some thin horizontal blue bars. These represent the amount of tax payable under an alternative tax regime where 'earnings per share' or 'eps' (as opposed to 'dividends per share' or 'dps' under the current legislation) are taxed. The inclusion of an eps tax system for comparison is noteworthy. Because it provides a benchmark against the amount of tax the same company would pay if it were NZ domiciled and paid out 100% of earnings as dividends. Notice that the blue lines of 'eps tax' are above the actual blue overseas tax downpayments in all cases. That means both overseas capital gains tax proposals require substantial *less* tax to be paid up front than if eps tax were adopted. Ultimately though, when the overseas investment is cashed up there is a substantial tax wash up bill, represented by the brown bar, that is not present with an eps tax system.

If you regard the eps tax system as a proxy equivalent for investing in New Zealand shares, you can see that the proposed capital gains will result in a tax bill some 40% higher. That doesn't mean the taxpayer will be better off investing in NZ though - if the growth profile for the overseas company you choose to invest in is 40% higher than any NZ equivalent company.

SNOOPY

duncan macgregor
19-04-2006, 01:30 PM
Welldone SNOOPY, It all means nothing to me however. I believe in investing only on the home market. Why should i invest overseas when the country that I live in is screaming out for development. I have no problem with exchange rates, I fully understand my tax obligations. If it all hits the fan my money is safely in the local bank in five min flat. If you want to invest in a country overseas, then add that to your risk. To spreadeagle your investments all over the world tells me an investor is incapable of working systems out to give them more than a decent return in NZ. Reading the posts on this subject tells me that most of you dont have a clue what is going on with tax obligations. Work out your buy and sell systems, then you can forget all that garbage with overseas investments. macdunk

Deev8
19-04-2006, 06:19 PM
quote:Originally posted by Snoopy

Do you agree or disagree?

Finally got back to this after going away for a couple of days, and basically having reworked my way through the example I do agree with your interpretation.


quote:Originally posted by Snoopy

Deev8, something has happened to your arithmetic here.

By my calculator

-$NZ13.69 - $NZ682.53 = -$NZ696.22

Or am I misinterpreting what you are trying to do?

That was an arithmetic error ... and one that's difficult to understand. So moving quickly ahead ...

My basic mistake was in assuming that taxable amount for the year would be calculated as 5% of the value of the investment at the start of the year. The fact that no dividends were received and the investment made a capital loss (even when the sum carried forward from the previous year is considered) means that no tax is payable that year. And assuming that the loss isn't set-off against other liabilities a loss of NZD 13.69 is carried forward to the next year.

It was a simple mistake with a one-share portfolio, which I believe illustrates the possible pit-falls when we have to do this in reality.

Deev8
19-04-2006, 06:25 PM
quote:Originally posted by Snoopy


The specific words that caught my attention were:

"any negative “available to tax“ amount would be available as a loss in proportion to the ratio of the realisation to the market value of the pool at the time."

That's why I only carried forward the -$NZ13.69 as the loss to be carried forward beyond FY2003. -$NZ13.69 is the equivalent of the 'available to tax' (although I don't like that term) amount in the investment income discussion document. No mention is made in the reference paragraph of the equivalent NZ$682.53 'downpayment' proxy taxable income amount.

This is my own interpretation of the literature out there. I still could be wrong.


I believe that you are correct, or at least, having re-read the document I agree with your interpretation ... but we could both be wrong. A lot of detail needs to be clarified before April 2007.

Snoopy
07-09-2006, 09:54 PM
*The PWC proposal*

Price Waterhouse Coopers, via Chairman John Shewan, has presented to the parliamentary select committee a rival proposal to the Cullen/Dunne unreleased capital gains tax. This proposal has received favourable consideration by the parliamentary select committee. They have asked for the submission to be developed in more detail.

The proposal is relatively simple in concept:
The investor pays tax on the maximum of

i/ the overseas dividends received only OR
ii/ 3% of the averaged value of the investment at the beginning and end of the current financial year.

An advantage of this tax proposal, the way it is pitched, is that the ultimate tax liability is between 1 to 2 percent of the capital value of the shares. Even in low dividend yielding economies, such as the US, many shares do pay dividends at these levels. For that reason alone this PWC scheme is better balanced (more ‘cashflow affordable’). So how would the PWC proposal work in practice?

(continued)

SNOOPY

Snoopy
07-09-2006, 09:55 PM
Not all details of how this proposed tax would work have been tabled. That means I need to make some assumptions about how it would work in practice. In the first year of share ownership we shall use the ‘buy in price’ as the ‘year beginning opening price’, and reduce the capital to be taxed by the brokerage spent acquiring the shares. We shall also assume that the tax is levied in local (NZ) currency. IOW exchange rate movements are taken into account.

Mathematically this new Price Waterhouse Coopers proposed DRWT (Dividend Relieved Wealth Tax), can be expressed as follows.

A is the market value of the unit holding at the end of the income year.
A1 is the aggregate of all gains (e.g. capital returns) derived from holding or disposing of the interest during the income year (excluding dividends)
B is the market value of the unit-holding at beginning of the income year; and
B1 is the total expenditure incurred by the holder during the income year including cash issues, and any cost incurred acquiring or increasing the holding.
D is the sum of dividends received during the income year

Deemed Taxable Income = max [0.03x½{(A+A1)+(B-B1)}, D]

Before anyone celebrates too much the possible dumping of the Cullen-Dunne proposal, I think it is useful to run through what would happen to our sample investor, the one who holds those YUM shares in the United States. Let’s see how ‘Ms Investor’ (we shall call her ‘I’) fares under this new DRWT (Dividend Relieved Wealth Tax). The words ‘Wealth tax’ don’t sound all that attractive do they? But that is exactly what this tax proposal is.

(continued)

SNOOPY

Snoopy
07-09-2006, 09:57 PM
Problem Part 1 (DRWT September 2006 proposal)

Let's assume 'I' bought 100 shares (we'll keep everything in round numbers) in December 2000 for $US34.655 dollars per share at an exchange rate of $NZ1= US42.32c. Brokerage was $US51.99. The shares paid no dividend in the time ‘I’ held them up until 31st March 2001, at which time the share price had increased to $US38.19. Furthermore the exchange rate changed to $NZ1= US42.19c. How much tax would ‘I’ pay on these shares for FY2001?

Using 0.03x½{(A+A1)+(B-B1)}:

0.03 x ½{(3819/0.4219 + 0) + (3465.5/0.4232 - 51.99/0.4232)} = $NZ256.77

Now, 'Deemed Assessable Income' is the maximum of the dividend received (nil) and $NZ256.77 (as just calculated). That means the tax payable, based on a 33% tax rate is:

0.33 x $NZ256.77= $84.73

(continued)

SNOOPY

Snoopy
07-09-2006, 09:58 PM
Problem Part 2 (DRWT September 2006 proposal)


It is now the end of FY2002. ‘Yum Restaurants International’ paid no dividends during the entire year. ‘I’ didn't buy or sell any shares during the year and the share price improved to $US58.78 based on an exchange rate (at 31st March 2002) of $NZ1= US43.06c. How much tax would ‘I’ pay for FY2002?

Using our formula: 0.03x½{(A+A1)+(B-B1)}

0.03x½{(5878/0.4306+ 0) + (3819/0.4219 - 0)}= $NZ340.53

Again there is no dividend paid, so the deemed assessable income is $NZ340.53 by default

Assuming a 33% tax rate, the tax payable is 0.33x $NZ340.53= $NZ112.38.

(continued)

SNOOPY

Snoopy
07-09-2006, 10:00 PM
Problem Part 3 (DRWT September 2006 proposal)

We have now rolled forwards to FY2003, and Mr. Market has thrown in a couple of curved balls. On 30th September 2002 there was a 1:1 share split. As at 31st March 2003 the YUM share price was $US24.33 and the exchange rate on that date was $NZ1 = 55.12c. But instead of owning 100 shares 'I' now own 200 (due to the share split). Once again no dividend was paid during the year.

The estimate of tax to pay based on deemed assessable income is based on a fixed multiple of the capital ‘I’ has (averaged between the start of the year, and the end of the year), *no matter what the actual performance of the share price during the year*.

Using our formula: 0.03x½{(A+A1)+(B-B1)}

0.03 x½[( 100x58.78/0.4306 )+( 200x$24.33/0.5512 )] = $NZ337.18

Assuming a 33% tax rate the tax to pay would be: 0.33 x $NZ337.18=$NZ111.27

Note that for this financial year the tax due is not only cash flow negative (always the case when a company doesn’t pay a dividend), but there is also tax to pay even though ‘I’ has made a loss on the investment of $4,822.71 for the year. What is more the tax payable on the loss cannot be recovered even if subsequently this company goes broke. That is a bitter pill to take.

(continued)

SNOOPY

Snoopy
07-09-2006, 10:05 PM
Problem Part 4 (DRWT September 2006 proposal)


It is now the end of FY2004. Again ‘I’ hasn’t bought or sold any shares and no dividends have been paid. The share price is now $US37.99 and the exchange rate is $1US= 65.75c. What is the tax liability for ‘I’ in FY2004?

As at 31st March 2003 (start of the financial year) the ‘Yum Restaurants International’ share price was $US24.33 and the exchange rate on that date was $NZ1 = 55.12c.

Using our formula: 0.03x½{(A+A1)+(B-B1)}

0.03x½{(200x24.33)/0.5512 + (200x37.99)/0.6575 } = $NZ305.76

Assuming a tax rate of 33% the tax to be paid is:

0.33x $NZ305.76= $NZ100.90.


SNOOPY (to be continued)

Snoopy
07-09-2006, 10:07 PM
Problem Part 5 (DRWT September 2006 proposal)

The share price was $US37.99 and the exchange rate is $1US=65.75c at the start of FY2005. At the end of FY2005 the share price was $US51.81 and the exchange rate was $1US=70.70c

During FY2005 ‘Yum Restaurants International’ started paying dividends for the first time.
These dividends were at the rate of 10c per share, making a gross total of $20 per dividend payment. Withholding tax was deducted at a rate of 15%. That works out at $3 per dividend payment, leaving a net return of $17. Dividends were paid on three dates during FY2005. These dates accompanied by the $NZ/$US exchange rate on the day follow:

Div payment date 1: 6th August 2004; $NZ1=US64.47c
Div payment date 2: 5th November 2004; $NZ1=US69.05c
Div payment date 3: 4th February 2005; $NZ1=US71.02c

Once again ‘I’ makes no further share purchases or share sales during the year. What is ‘I’ tax liability for FY2005, due to owning these ‘Yum Restaurants International’ shares?

'Deemed assessable income' is the maximum of either (a) the dividend income or (b) the amount calculated using the capital appreciation formula

(a) Total dividend income, including all withholding tax is:
(20/0.6447 + 20/0.6905 + 20/0.7102)= $NZ88.15

(b) Wealth tax due is: 0.03x½{(A+A1)+(B-B1)}
0.03x½{(200x51.50)/0.7070 + (200x37.99)/0.6575} = $NZ391.87

Clearly (b) is larger than (a), so the dividends received are not enough to offset our wealth tax liability. That means $NZ391.87 becomes our 'deemed assessable income'.

Based on at tax rate of 33%, ‘I’s tax liability is:

0.33 x $NZ391.87= $NZ129.32

However, some US withholding tax -that is recognized in NZ as part of a dual taxation agreement, has already been paid, specifically:

(3/0.6447 + 3/0.6905 + 3/0.7102)= $NZ13.22

That leaves the net amount of tax to pay as:

$NZ129.32-$NZ13.22=$NZ116.10

(end of second method example)

SNOOPY

Snoopy
08-09-2006, 12:20 PM
quote:Originally posted by aspex

Snoopy,
All of your good work shows without a doubt that average taxpayer is out of his/her depth.


Certainly with the Price Waterhouse Coopers proposal they should not be. For sure some may be confused with some of the mathematical notation I use. But if you keep in mind the general principle which is:

1/ Value your holding at the start of the Year.
2/ Value your holding at the end of the year.
3/ Take the average of 1 and 2.
4/ Pay tax on that amount EXCEPT if you have already paid tax on dividends greater than this amount then you don't have to do anything.

That shouldn't be too daunting for taxpayers should it? I know that some people can't think in mathematical equations (fortunately I can) . But whichever you want to think of it, all I am doing is following the four steps above. -even if it *looks* more complex than that at a casual glance!


quote:
Anyway, it looks more likely that a compromise and "simple" system could eventuate.


Don't automatically embrace the devil that you don't know!

SNOOPY

Snoopy
08-09-2006, 01:15 PM
Here is the post that you have all been waiting for. The 'summary' post that lets you see the effect of the Price Waterhouse Coopers proposal stacked up side by side against the Cullen/Dunne legislative proposal, in the special but not atypical case of this particular YUM shares example.

http://img.villagephotos.com/p/2005-3/963787/CulDunPWCtax.gif

If you look at the light blue bars, they show the actual tax payable each year. If you look at the 'total' column, you can see that the total tax paid to the government is about the same under each proposal.

There are some differences in the timing of the tax downpayments, most pronounced in FY2003. That year, tax is due in the PWC proposal - even though you make a large loss for the year. Nevertheless the total tax downpayments, spread over many years, are similar. Where the PWC system scores 'big time' is that there is no overhang of tax due that is carried forward into future years. That means the ultimate tax liability of anyone under the PWC system is likely to be much lower, because the tax downpayments due are in fact the *total* tax payments - there is no future tax waiting to be paid as under the Cullen-Dunne system.

However, take away the overall lower tax liability. Then IMO, the PWC proposal stinks. It suffers the significant disadvantage of tax being charged even in years where large losses are made. Although the PWC system is reasonable on a cashflow basis over the business cycle, this 'reasonableness' is contingent on the taxable amount being taken from a modest 3% of portfolio value. If the government were to adopt the PWC proposal, but up the taxable amount to (say) 5% of portfolio value, it would look far less reasonable! Furthermore there is every chance the government *would* raise the taxable proportion, because the ultimate total tax payable under the PWC plan is so much less under the Cullen/Dunne legislative proposal.

IMO the preferred way ahead (other than complete abandonment which hardly seems like a realistic option) would be to retain the Cullen/Dunne proposal but remove the 'overhang' of tax due in future years, if say the shares were held for five years or more. This would provide a similar tax income for the government to the PWC proposal. But the anomaly of having to pay large amounts of tax in a year where you made a large loss, or indeed suffered permanent loss through company bankruptcy, would be mostly removed. However, would the government be agreeable to such a large potential decrease in tax income from any new proposed scheme? I suspect not.

The logical way to increase government tax income, should the PWC scheme be adopted, is to increase the taxable threshold from PWCs recommended 3% to (for example) 5%. That IMO would be disastrous. IMO the PWC proposal should be opposed. I think the PWC proposal is conceptually flawed, even though is has been 'dressed up' as 'OK' by using a low headline taxable capital rate of only 3%.

SNOOPY

Halebop
08-09-2006, 02:04 PM
Anything that takes cash flow away from a low yielding investment is flawed. Anything that skews the playing field in favour of categories or destinations is flawed. Neither proposal deserves debate. Government already know they have a loser but haven't quite worked out how to drop the smoking potato. An incoming National/Alternative Government would surely have a mandate to reverse any Cullen inspired CGT in any case.

The focus around taxing piecemeal and incrementally seems to be to avoid the distortionary impact that a capital gains tax on sale has on investment decisions. That is: I have an asset that is worth $200, I paid $20, so will be taxed on $180 at sale, therefore that contingent liability influences my decision to continue to hold lest my wealth diminish by $50 or $60 in a single hit from IRD.

On the other side a capital gains tax at time of sale is more affordable from a cash flow perspective. Often it's the only time many investments provide meaningful cash flow.

An alternative would be to calculate tax at whatever effective / annual rate is thought appropriate. ...But then allow the investor the option of either paying the tax each applicable year or accruing it until asset sale time. Accrued tax could be charged compound interest at the prevailing government stock rate or another suitable "deemed" rate. This way cash flow need not be impacted but investment decisions are less influenced by relative value differentials between the asset's market value and contingent tax liability.

Additionally, either all asset classes should be taxable or none at all. The logic and fairness of this argument should be apparent to everyone?

Finally, a crystal clear definition on trading versus investing would be required to make any CGT proposal work.

Snoopy
09-09-2006, 02:01 PM
quote:Originally posted by Halebop



The focus around taxing piecemeal and incrementally seems to be to avoid the distortionary impact that a capital gains tax on sale has on investment decisions. That is: I have an asset that is worth $200, I paid $20, so will be taxed on $180 at sale, therefore that contingent liability influences my decision to continue to hold lest my wealth diminish by $50 or $60 in a single hit from IRD.


If you believe the original discussion document, the whole point of this Cullen/Dunne proposal is to level the playing field between NZ and overseas investments. The main problem with NZ sharemarket investments is that we are based on an island nation about as far away from global commerce centres as it is possible to get. That means it is a big leap to go from being a sizeable player in the NZ market to expand overseas. For most NZ companies such a leap is too difficult and they satisfy themselves with being a big fish in a small pond, and getting rid of excess cash by paying high dividends.

Thus you have the typical NZ share (Low growth, high dividend) that stacks up against all sorts of growth opportunities overseas (high growth, low or no dividend) that are only an investor's mouse click away. The aim of the Cullen/Dunne proposal is to try and make each kind of investment decision 'tax neutral'. When you want to truly level the playing field between 'high dividend and taxed' and 'high growth untaxed', the only option that I can see is to tax the high growth in some form. That means a capital gains tax. But Cullen has said no to a general capital gains tax. Thus Cullen is faced with trying to concoct some other tax that is a proxy for a capital gains tax, but can't be called a capital gains tax.

When these proxy taxes get scrutinized in detail it becomes obvious that they really are a capital gains tax by another name and then all the bad mud starts flying. IMO Cullen has painted himself into a corner here. You can't equalise taxed dividend investment returns and untaxed capital gains without taxing capital gains which Cullen has refused to do - Catch 22.

SNOOPY

Snoopy
09-09-2006, 02:12 PM
quote:Originally posted by Halebop


An alternative would be to calculate tax at whatever effective / annual rate is thought appropriate. ...But then allow the investor the option of either paying the tax each applicable year or accruing it until asset sale time. Accrued tax could be charged compound interest at the prevailing government stock rate or another suitable "deemed" rate. This way cash flow need not be impacted but investment decisions are less influenced by relative value differentials between the asset's market value and contingent tax liability.


Halebop's suggestion sounds a bit of an administrative nightmare, but actually I think it is rather a good idea. You capture the capital gains *but* you take away the cashflow nightmare of the investors tax liability. And those who do decide to pay tax up front are 'rewarded' by being able to dive out from under any penalty borrowing rates. So there is still an incentive to pay tax when you can afford it. Brilliant!

SNOOPY

(who while he likes the solution, is nevertheless not happy with the original problem, as he is not convinced that the 'problem' of kiwis directing too much of their savings overseas even exists.)

Snoopy
18-09-2006, 01:32 PM
quote:Originally posted by Snoopy


The logical way to increase government tax income, should the PWC scheme be adopted, is to increase the taxable threshold from PWCs recommended 3% to (for example) 5%. That IMO would be disastrous. IMO the PWC proposal should be opposed. I think the PWC proposal is conceptually flawed, even though is has been 'dressed up' as 'OK' by using a low headline taxable capital rate of only 3%.


Well, well, well. Cullen *has* bumped up the 'deemed dividend rate' to 5% of (opening) share value! Sorry to be so accurate with my predictions. Bad news. OTOH the wiping of tax when investors make a loss has to be good. It would be appalling if investors had to sell out at the bottom of the market because they had insufficient cashflow to pay their tax bill.

So will my fears be confirmed, or have I just been scaremongering? Time to take up the case of Ms Investor again, under this new proposed Cullen/Dunne 'Wealth Increase Low Dividend Capital Adjusted Tax' (WILDCAT tax for short).

SNOOPY

Halebop
18-09-2006, 05:13 PM
quote:Originally posted by Snoopy


Halebop's suggestion sounds a bit of an administrative nightmare, but actually I think it is rather a good idea. You capture the capital gains *but* you take away the cashflow nightmare of the investors tax liability. And those who do decide to pay tax up front are 'rewarded' by being able to dive out from under any penalty borrowing rates. So there is still an incentive to pay tax when you can afford it. Brilliant!

No doubt about it, the thing would be an awful idea (administratively) but I was just trying to theorise a concept that would meet their challenge of taxing on the go without punishing those who don't generate an income but might ultimately generate more wealth (and tax dollars).

Ultimately, despite the skewing effect you get by investors holding more because of tax ramifications than because of investment merits, I think a CGT at time of sale is both easiest to use (there are no calculations until you sell) and fairest to apply (when you sell you have the money to pay).

Irrespective of what the government decide, you can count on the fact that the people they say are the ones they are trying to capture in the net will be the ones least likely caught. Why they would create this stink defies logic? The corporations who have the most to gain (NZ based fund managers) don't vote. The managers of the corporations don't vote Labour (maybe they will now?). The people who will be taxed most are those who are already taxed most. The medium sized fish caught in the net will logically do what the government has asked them and invest only in NZ Shares, Australian Shares and local real estate. (Yay macro wealth growth equation from that last one).

Snoopy
18-09-2006, 06:42 PM
quote:Originally posted by Snoopy

Time to take up the case of Ms Investor again, under this new proposed Cullen/Dunne 'Wealth Increase Low Dividend Capital Adjusted Tax' (WILDCAT tax for short).


The ‘WILDCAT’ tax proposal is relatively simple in concept:
The investor pays a wealth tax as a proxy for ‘fair dividends’ based on 5% of the opening value of the investment at the beginning of the current financial year. Very simple so far, but there is inherent unfairness in such extreme simplicity.

If the actual return the sum of dividends & capital appreciation was less than 5%, then the taxpayer would pay tax on that lower actual amount ‘deemed earned’ instead. Finally no tax would be payable if the combined dividend income and capital losses are negative.

If one must have a new tax regime for overseas shares this, on the surface, sounds reasonable. Let’s see how it would work in practice.

Problem Part 1 (WILDCAT September 2006 proposal)

Let's assume 'I' bought 100 shares (we'll keep everything in round numbers) in December 2000 for $US34.655 dollars per share at an exchange rate of $NZ1= US42.32c. Brokerage was $US51.99. The shares paid no dividend in the time ‘I’ held them up until 31st March 2001, at which time the share price had increased to $US38.19. Furthermore the exchange rate changed to $NZ1= US42.19c. How much tax would ‘I’ pay on these shares for FY2001?

Using 0.05x(V-V1) where V is the value of the shares at the start of the year and V1 is the value of $NZ put into those shares during the year (in year 1 this means brokerage):

0.05 x{($US3465.5/0.4232 - $US51.99/0.4232)}= $NZ403.30

There is no dividend and the share valuation did go up by more than 5% during the year. So $NZ403.30 is the deemed ‘Fair Dividend Rate’. That means the tax payable, based on a 33% tax rate is:

0.33 x $NZ403.30= $NZ133.09

SNOOPY (to be continued)

Snoopy
18-09-2006, 06:56 PM
Problem Part 2 (WILDCAT September 2006 proposal)


It is now the end of FY2002. ‘Yum Restaurants International’ paid no dividends during the entire year. ‘I’ didn't buy or sell any shares during the year and the share price improved to $US58.78 based on an exchange rate (at 31st March 2002) of $NZ1= US43.06c. How much tax would ‘I’ pay for FY2002?

Using the formula for ‘Fair Dividend rate’: 0.05x(V-V1)

0.05x($US3819/0.4219 - 0)= $NZ452.60

Again there is no dividend paid and the shares appreciated in value by more than 5%, so the deemed ‘Fair Dividend Rate’ assessable income is $NZ452.60 by default

Assuming a 33% tax rate, the tax payable is 0.33x $NZ452.60= $NZ149.36

(continued)

SNOOPY

Snoopy
18-09-2006, 06:59 PM
Problem Part 3 (WILDCAT September 2006 proposal)

We have now rolled forwards to FY2003, and Mr. Market has thrown in a couple of curved balls. On 30th September 2002 there was a 1:1 share split. As at 31st March 2003 the YUM share price was $US24.33 and the exchange rate on that date was $NZ1 = 55.12c. But instead of owning 100 shares 'I' now own 200 (due to the share split). Once again no dividend was paid during the year.

Using our formula: 0.05x(V-V1)

0.05 x (200x$US24.33/0.5512) = $NZ441.40

If we look at the change in capital position including dividends (there are no dividends in this instance) we find:

(200x$US24.33/0.5512) -(100x$US38.19/0.4219)= -$NZ223.90

That is a loss for the year, so no tax is payable.

Note that if this company were to go broke (god forbid) the tax already paid on the notional dividend received during years 1 and 2 (even though no dividend was received at all as a matter of fact) is not recoverable, or even offsetable, against gains made in future years.
In bankruptcy, not only would you lose all your investment but also you would have paid a tax levy to the government on the way through for the privilege of doing so. That would be a bitter pill to take.

(continued)

SNOOPY

Snoopy
18-09-2006, 07:01 PM
Problem Part 4 (WILDCAT September 2006 proposal)


It is now the end of FY2004. Again ‘I’ hasn’t bought or sold any shares and no dividends have been paid. The share price is now $US37.99 and the exchange rate is $1US= 65.75c. What is the tax liability for ‘I’ in FY2004?

As at 31st March 2003 (start of the financial year) the ‘Yum Restaurants International’ share price was $US24.33 and the exchange rate on that date was $NZ1=US55.12c.

Using our formula: 0.05x(V-V1)

0.05x(200x24.33)/0.5512 = $NZ441.40

The profit and loss position for the year is

(200x$US37.99)/0.6575 -(200x$US24.33)/0.5512 = $NZ2727.88,

or more than our notional ‘Fair Dividend rate’. That means this year we get a ‘free lunch’, as we only have to pay tax on the fair dividend rate.

Assuming a tax rate of 33% the tax to be paid is:

0.33x $NZ441.40= $NZ145.66.

(continued)

SNOOPY

Snoopy
18-09-2006, 07:04 PM
Problem Part 5 (WILDCAT September 2006 proposal)

The share price was $US37.99 and the exchange rate is $1US=65.75c at the start of FY2005. At the end of FY2005 the share price was $US51.81 and the exchange rate was $1US=70.70c

During FY2005 ‘Yum Restaurants International’ started paying dividends for the first time.
These dividends were at the rate of 10c per share, making a gross total of $20 per dividend payment. Withholding tax was deducted at a rate of 15%. That works out at $3 per dividend payment, leaving a net return of $17. Dividends were paid on three dates during FY2005. These dates accompanied by the $NZ/$US exchange rate on the day follow:

Div payment date 1: 6th August 2004; $NZ1=US64.47c
Div payment date 2: 5th November 2004; $NZ1=US69.05c
Div payment date 3: 4th February 2005; $NZ1=US71.02c

Once again ‘I’ makes no further share purchases or share sales during the year. What is ‘I’ tax liability for FY2005, due to owning these ‘Yum Restaurants International’ shares?

The ‘Fair Dividend rate’: 0.05x(V-V1) is

0.05x(200x37.99)/0.6575 = $NZ577.79

The total actual dividend income, including all withholding tax is :

(20/0.6447 + 20/0.6905 + 20/0.7102)= $NZ88.15

Clearly this is below the ‘Fair Dividend rate’, yet some US withholding tax -that is recognized in NZ as part of a dual taxation agreement, has already been paid, specifically:

($US3/0.6447 + $US3/0.6905 + $US3/0.7102)= $NZ13.22

We can use that tax already paid to offset tax that is deemed due under the ‘Fair Dividend rate’ method.

(200x$US51.50)/0.7070 - (200x$US37.99)/0.6575 = $NZ3012.71

Clearly this gain is larger than our fair dividend rate

Based on a tax rate of 33%, ‘I’s tax liability is:

0.33 x $NZ577.79= $NZ190.67

But some of that tax has already been paid in the USA. That leaves the net amount of tax to pay as:

$NZ190.67-$NZ13.22=$NZ177.45

(end of workings showing WILDCAT method in action)

SNOOPY

Snoopy
18-09-2006, 07:45 PM
Time to look at the cashflow from the newly proposed 'WILDCAT' tax compared to the legislative proposal

http://img.villagephotos.com/p/2005-3/963787/CulDunvsWildcatTax.gif

By comparing the size of the 'total' tax take mountain, you can see that Cullen/Dunne have made a significant concession in terms of total tax due. From a cashflow perspective however (blue columns), the WILDCAT proposal actually means 'more money sooner' for the government, a fact that won't make them unhappy.

WILDCAT shares with the Cullen/Dunne legislative proposal a tax holiday in FY2003 during the poor year when the investment value slumped. I should add here that *only* WILDCAT (of the proposals so far) guarantees that no tax is payable in down years. The downside of WILDCAT is that no overseas tax losses can be carried forward under these circumstances either. A further downside of 'WILDCAT' is that under conditions of investment volatility over several years, it is likely that the same capital gain portion of capital value will be taxed more than once.

WILDCAT has quite a large cashflow issue. At no time - even during the final dividend year - does cashflow from the company get anywhere near the amount that needs to be paid to the NZ IRD for tax. The problem is that unless you only tax actual capital gains banked, *all* of these proxy tax methods will have cashflow issues.

What is needed to make things always cashflow manageable here is something like Halebops deferred payment plan system. Without this there are going to be cashflow problems almost by design. If we accept this design limitation, I think Cullen and Dunne have come up with the goods here. If I have to choose a new overseas investment tax regime based not on realised capital gain then this is the best one so far (IMO).

SNOOPY

Dazza
18-09-2006, 09:36 PM
appreciate it snoopy
keep up the good work

Snoopy
02-10-2006, 05:50 PM
quote:Originally posted by aspex

Questions for Snoopy
What is the assessed income in each case?


OK aspex, I shall answer (with the qualification that the information I am basing this answer on is based on government press releases and is incomplete in detail). The government has come up with a new platitudinal acronym to describe this new tax but I shall continue to use the acronym 'WILDCAT' for consistency. The answers I give apply to private individuals, not operators of managed funds.


quote:
1. Start of year at capital $100k. Dividend income $3k. Cap gain $10k


'Deemed income' is $5,000 (based on 5% of opening capital), so based on a tax rate of 33% the actual tax payable will be 0.33 x $5,000= $1,650.


quote:
2. Cap. $100k Dividend income $7k. Capital loss -$10k


The capital loss more than wipes out any dividend income, so no tax is payable.


quote:
3. Cap. $100k Nil dividends. Capital loss -$10k


Again the capital loss more than wipes out any dividend income (which happens to be nil in this example) so no tax is payable.

SNOOPY

Snoopy
06-10-2006, 02:21 PM
quote:Originally posted by aspex

Thanks, Snoopy.
I presume that if the dividend income were $7k and there was also a gain of $10k, tax would be payable on the $7k rather than on the $5k notional income. Sorry, I should have included that one in the list.


If you start with $100,000 worth of shares Aspex, as an 'opening balance' my reading of the examples given are that you would only pay tax on 5% of the opening value of your overseas portfolio, or $5,000 worth.

The amount of tax you would pay, based on a 33% tax rate would therefore be:

0.33 x $5,000= $1,650, *regardless of the fact that your actual income was higher ($7,000) and the fact that you made a capital gain on top of that!*

SNOOPY

Mr_Market
13-12-2006, 06:24 PM
What if you had zero investment balance on 'opening balance day'? Say that coincidentally you happened to sell down your investments the day before balance day, then also happened to buy them back the day after balance day.

Mr_Market
14-12-2006, 05:49 PM
quote:Originally posted by aspex

Yeah right.
It could save heaps but then you may become a trader, even if you are out and into the same stocks.


Two trades in a year does not make you a 'trader'.

Snoopy
14-12-2006, 08:05 PM
quote:Originally posted by Mr_Market


Two trades in a year does not make you a 'trader'.


Two trades a year based on a 1.5% commission will result in the loss of 3% of your capital every year.

Cullen's 'Wildcat' tax at a 33% tax rate on 5% of your opening balance will result in the loss of 1.65% of your capital every year.

Thus the tax saving strategy proposed by Mr Market, if it is allowed, will save you the tax. But you will lose *far more money* than your potential tax obligations simply by being forced to pay double brokerage fees every year.

I guess some people would see Mr Market's idea of 'dodging the tax' as a good strategy, even though it would cost one far more than any potential 'Wildcat' tax obligation if carried out!

SNOOPY

Snoopy
15-12-2006, 04:33 PM
quote:Originally posted by aspex

Snoopy,
When was the last time you paid 1.5% commision each way on overseas transactions. These days about $30 on just about any transaction would be the limit.


Excluding some more recent buying in Australia the last time I bought overseas cost me about 3% 'one way', because both the overseas broker and the local broker (both full service) clipped the ticket! Admittedly this was seven years ago and things may have now changed

But unless your each way commission payable is 0.825% or less, 'Mr_Market's strategy still won't work. Do you know any brokers operating outside of Australasia with fees that low?


quote:
You do risk the difference between the dates of the two transactions (which could be to your advantage).


-OR- it could equally well be to your disadvantage. I don't think yo can claim your three day crystal ball is any more accurate than a coin flip.

SNOOPY

Halebop
15-12-2006, 05:21 PM
quote:Originally posted by Snoopy

...But unless your each way commission payable is 0.825% or less, 'Mr_Market's strategy still won't work. Do you know any brokers operating outside of Australasia with fees that low?

Here's a site that compares online broker pricing in the major English speaking markets a Kiwi might more probably expect to invest in:

http://www.stockbrokerguide.com/

US based brokers effectively charge much lower fees than the 0.3% or so you might expect at say ASB. At the US$10 per trade many US brokers charge you'd need to be buying or selling just US$1,200 worth of shares to be paying 0.825%. US based brokers have a minimum limit on the size of account you can set up anyway (I think it's a statutory requirement to identify you as a "sophisticated" investor). So the chance of paying anything like 0.825% is nil unless you diversify yourself to investment mediocracy. ...I notice some stated values are out of date compared to what I pay in NZ, Australia and USA but they are in the ball park.

Mr_Market
15-12-2006, 05:45 PM
quote:Originally posted by Snoopy


quote:Originally posted by Mr_Market


Two trades in a year does not make you a 'trader'.


Two trades a year based on a 1.5% commission will result in the loss of 3% of your capital every year.

Cullen's 'Wildcat' tax at a 33% tax rate on 5% of your opening balance will result in the loss of 1.65% of your capital every year.

Thus the tax saving strategy proposed by Mr Market, if it is allowed, will save you the tax. But you will lose *far more money* than your potential tax obligations simply by being forced to pay double brokerage fees every year.

I guess some people would see Mr Market's idea of 'dodging the tax' as a good strategy, even though it would cost one far more than any potential 'Wildcat' tax obligation if carried out!



Snoopy, All my stocks are US based. I pay about $10 per trade no matter what the size of the trade. My brokerage cost would amount to about 0.04% of the value of my entire portfolio if I were to sell down then re-buy.

Looks a bit more attractive now doesn't it. [:p]

Halebop
15-12-2006, 07:25 PM
... I meant to say "0.1% or so you might expect at ASB" but in any case well below a figure like 0.825%.

Transaction costs really don't factor into any comparison. US based brokers have the attraction of being able to execute on ADRs too so the US market reach includes major companies from around the globe.

Mr Market's point I think highlights the dumbness of the (re-re-amended) proposal. His strategy is obvious so I'm sure IRD would position themselves to mitigate it but the effort involved would surely be wasteful and under-productive. The original logic of the tax has been lost (Fund Managers are once again disadvantaged) while nimble private investors can structure investments or divert them via Australia to minimize tax liabilities. A huge waste of effort that will proportionately tax red voters more than blue.

I can only imagine the tax proposal is politically motivated rather than fiscally but can't quite see the mileage from it... worse for Labour (and particularly Dunne) I can see a canny opposition tarring housing and domestic investments with the same red-coloured-tax-net brush to score points at election time.

Mr_Market
15-12-2006, 08:01 PM
Agree absolutely Halebop. I'm just trying to point out some of the absurd consequences of this ill-conceived bill.

I actually attended one of the select committe hearings. As I sat there listening to the oral submitters presenting their arguments for and against the varied and complex aspects of the proposal, I observed glazed looks upon the the faces of the majority of the committee members. How many of them really understand this I thought to myself. Must these decisions really be left in the hands of amateurs?

mjdtrader
31-12-2006, 06:31 AM
quote:Originally posted by aspex

The proposed bill includes transactions where a buy and sell is made in the one year. They are trying to circumvent the "low" initial balance below the threshold.:(


Hi Aspex

Could you expand on your statement on how trades during the year apply. Apart from capital gains i dont see how that 5% of portfolio 'start'-'end' of year would apply in that case.

Mr_Market
31-12-2006, 07:02 PM
I'm considering updating the Wikipedia entry for 'Wealth Tax' (http://en.wikipedia.org/wiki/Wealth_tax) with a New Zealand entry, given that this is what this new legislation amounts to.

Does this sound like the NZ govt (or should I say Labour govt)?
:
'Most of the governments levying this net worth tax are big spenders with a relatively high government spending to GDP rate. And in no place where this kind of tax is in place does it contribute to more than 0.3% of the total tax intake ([1]). It is therefore seen by some people as a statement of philosophy more than a considerable revenue base for the government.'

mjdtrader
01-01-2007, 06:12 AM
quote:Originally posted by aspex


quote:
Hi Aspex

Could you expand on your statement on how trades during the year apply. Apart from capital gains i dont see how that 5% of portfolio 'start'-'end' of year would apply in that case.

Yes. I got a letter summarising the deliberations of the committee.
See: http://www.taxpolicy.ird.govt.nz/publications/files/bill48-2.pdf page 6 referring to "quick sales"


Thanks again, i have read through this IRD summary but i do not understand how this quick sale is supposed to work. For example if you start the year with $100000 NZ in overseas shares, but during the same fiscal year ( April 1st and sell before March 31st)you buy and sell shares and make a small capital gain on them.
Reading the bill it seems you will be required to pay %5 tax on these "quick sales" seperatly
Do we then pay this quick sale tax seperatly (ie have to show this capital gain seperatly and pay a seperate tax bill for these quick sells ?)
Then pay a pooled portfolio tax of %5 on any gain on the main pool.
(remembering the fact that your quick sales may haved increased the value main pool)at fiscal year end.
So i assume if i read this correctly - we are taxed twice on %5

I just dont understand these preposals, the bill i read is very vague in detail or examples.

I have many questions that i cannot find answers to

Grail
27-02-2007, 02:10 PM
with the "quick sale" rule does that mean that whether you are considered a trader or not you only get taxed at 5% (of your portfolio) instead of your income tax rate (on your total profit)?

Tim
27-02-2007, 03:18 PM
If I have a number of UK investment trusts, can the $50000 rule for overseas shares apply to these

Also with the changes should one overweight ones portfolio to ausssie and NZ.
comments appreciated

Snoopy
27-02-2007, 10:32 PM
quote:Originally posted by Grail

with the "quick sale" rule does that mean that whether you are considered a trader or not you only get taxed at 5% (of your portfolio) instead of your income tax rate (on your total profit)?


No. If you are a trader the rules are as they are now. Pay tax, at your marginal tax rate on all of your capital gains. But, to counteract that you can offset any profits you make by losses on losing trades.

For the investor, you have to be clear in your mind that there is a distinction between *your* marginal tax rate (which the overseas tax rules do not change) and what your 'deemed income' is (which is where the new rules make a difference). For quick sales the amount that is added to your 'deemed income' is the lower of 5% of your cost of purchase or the actual proceeds of your quick sale. Perhaps it is ripe to bring in a simple example here.

Your buy $100,000 worth of shares during the year and they shoot up to $140,000 in value at which point you sell in that same year. As a trader, assuming a 33% marginal tax rate, you pay:

($140,000-$100,000)x0.33= $13,200 in tax.

As an investor, who happens to sell out within a twelve month period you pay the lessor of what your trader friend pays for the same deal ($13,200) or the tax on what is 'deemed' your income, based on the opening value of what you bought. For the second option your would pay:

0.05 x $100,000 x 0.33= $1,650 in tax.

As you can see that is quite a bit less tax to pay for our 'investor' albeit $1,650 more than he/she would have paid the previous year before the new tax rules existed.

The 'sting' for our investor is that no tax deduction is available to be carried forward into subsequent years for any portfolio loss.

SNOOPY

Snoopy
27-02-2007, 10:43 PM
quote:Originally posted by Tim

If I have a number of UK investment trusts, can the $50000 rule for overseas shares apply to these


Yes the new tax rules will almost certainly apply to your UK investment trusts. Even if those trusts are listed on the NZX it doesn't save them. In fact the new rules were primarily set up with the express intention of taxing UK domiciled investment trusts.


quote:
Also with the changes should one overweight ones portfolio to aussie and NZ.


That is a tough question. If you overweight your portfolio to Oz and NZ shares the you can expect your portfolio to be more volatile. However, I have seen no evidence that your ultimate returns will be lower.

You should also remember that overseas fixed interest investments (outside Oz and NZ) are not subject to these new rules.

SNOOPY

Tim
28-02-2007, 03:23 PM
Thanks Snoopy

Alot to get ones head around.

Grail
28-02-2007, 09:31 PM
thanks for that snoopy, cleared things up for me

patsy
01-03-2007, 05:39 AM
Unless I'm reading the legislation wrong, it seems that foreign collective investment vehicles that invest in assets other than shares are not caught.

This includes vehicles like hedge funds (the OM products quite popular in NZ and Australia) and, for example, Australian REITs that invest directly into property. Hedge funds do not pay dividends so the implication is that they would not be taxed at all (i.e., no income tax, and no fair dividend rule). Direct property REITs pay Australian franked income so that's the equivalent of a bond EFT of Snoopy's previous message.

Snoopy
05-03-2007, 11:57 AM
quote:Originally posted by patsy

Unless I'm reading the legislation wrong, it seems that foreign collective investment vehicles that invest in assets other than shares are not caught.


From page 27 of the IRD report.

"The principle underlying the Commissioner’s making of a determination precluding use of the fair dividend rate method is that the method should not apply to investments in foreign entities that provide investors with a return similar to a New Zealand dollar denominated debt instrument." <snip>

"For the purposes of making a determination described under category 4 the criteria that the Commissioner will consider will include:
• The proportion of the foreign entity’s assets that comprise debt or other fixed return instruments (such as fixed rate shares).
• The extent to which the entity’s investments comprising debt or other fixed rate instruments are denominated in New Zealand currency.
• In relation to investments of the entity that are not denominated in New Zealand currency, the extent to which the exchange rate risk has been removed by swaps, forward currency contracts or other derivatives."

"The Commissioner will take into account the whole arrangement, including any interposed entities or financial arrangements, in ascertaining whether the investment in a foreign entity provides investors with a return similar to a New Zealand dollar denominated debt instrument."

I interpret all that to mean that any foreign assets that are *not* a defacto debt instrument are caught.

"This determination process is intended to provide sufficient flexibility to deal with cases close to the boundary."

And that 'escape clause' means that IRD reserves the right to change their minds on specific funds on a case by case basis.

"Determinations apply on a prospective basis only, <snip> For investments in place before 18 December 2006 (date of enactment of the new offshore tax rules), the Commissioner will apply any determination from the start of the tax year beginning after the making of the determination. This will also be the general rule for other investments <snip>"

I think this means that unless your 'borderline investmen't has been *specifically* checked out from information available *before* the start of the financial year, then there is no guarantee that it will be exempt.


quote:
Hedge funds do not pay dividends so the implication is that they would not be taxed at all (i.e., no income tax, and no fair dividend rule).


Patsy, I think you are being too broad brush with your comments here.

A hedge fund could easily operate purely in sharemarkets. At various times that could mean defacto ownership of shares. Those shares would pay dividends that could indeed be paid on to the hedge fund unitholders. It is equally possible that a hedge fund may only trade currencies and bonds. In that instance the hedge fund would be exempt from the new overseas ownership rules. That means your general statement that 'hedge funds do not pay dividends' is not true, even though it may be true in specific circumstances.


quote:
This includes vehicles like hedge funds (the OM products quite popular in NZ and Australia)


You are referring to the OM hedge fund products as promoted by Canopus Investments?

From the "www.canopus.co.nz" web page these funds

"...may feature a preset bonus return above a certain benchmark index compiled from price movements in the underlying baske

patsy
06-03-2007, 02:56 PM
I've checked with accountants at one of the "big four" firms. These are their comments:

1) Non-exempt taxpayers investing in any non-NZ-domiciled fund, regardless of the underlying investment (except for bonds, debt instruments, fixed interests) will be taxed using FDR (unless, of course, the total performance is less than 5%) - this includes REITs simply because the actual fund is not considered an "Australian company"

2) This includes hedge funds (incidentally, the one I was referring to was OM-IP www.maninvestments.com.au)

3) The above excludes funds that promise guaranteed returns (like a few within the OM-IP family) - those are taxed using the actual performance, not the FDR method

4) Most of NZ funds will apply for PIE status but IRD reserves the right of approving or declining such application - final ruling is expected by 1 October 2007

5) The only NZ fund for which there is still debate within the IRD is the Lion Tamer family - anything can happen to them (including ending up as an FDR fund, which will erode its performance)

5) Listed indices in both NZX and ASX are caught by the FDR rules

As an aside, I've just found this page:

http://www.moneyonline.co.nz/ Follow the "New Investment Taxes" link. There is a nice little summary there.

OldRider
06-03-2007, 06:05 PM
My undertanding of the OM family of funds is that they are not viewed as share owning funds,
but similarly to cash or fixed interest.

What happens with them is a certain percentage of their funds is given to the guaranteeing bank,this amount together with the interest acrued is sufficient to return the guaranteed amount. The balance is invested in derivatives and the like to get the growth.

As such any capital gain is taxable when the fund closes,thus they would not be a part of this regime any more than is a foreign bond.

My understanding only, do others have a different view?

Snoopy
06-03-2007, 06:39 PM
quote:Originally posted by patsy

I've checked with accountants at one of the "big four" firms.


Good work Patsy. I think when you ask for advice like this, you have to consider the angle the respondent is coming from. Anyone in the "big four" will be in "big trouble" if they issue wrong advice. That means where there is doubt, the advice will of necessity be conservative.


quote:
These are their comments:

1) Non-exempt taxpayers investing in any non-NZ-domiciled fund, regardless of the underlying investment (except for bonds, debt instruments, fixed interests) will be taxed using FDR (unless, of course, the total performance is less than 5%) - this includes REITs simply because the actual fund is not considered an "Australian company"


Are there ozzie REITs in the ASX200 or ASX all? If so they must be considered companies by the ASX. The NZ IRD document you quoted has an external link to the approved ASX company list with no rider that certain listings are excluded....

Do I have to count NZ managed overseas funds (who pay the new tax at the operational level, so the unit holder doesn't have to) in with my $NZ50,000 overseas investment allowance? If not, this may be the way to go to balance my overseas exposure in the future.

Do the Australian REIT pay less tax than an equivalent ASX company? If not, why would they be singled out as a 'tax dodge' vehicle by the NZ IRD?

I'm not expecting you to answer these questions Patsy. Just pointing out where the grey areas might be. Maybe your "big four" person knows the answers, or maybe he/she was just guessing.


quote:
2) This includes hedge funds (incidentally, the one I was referring to was OM-IP www.maninvestments.com.au)


Not surprising the "big four" say it is covered by the FDR, considering OM-IP use an 'opportunities portfolios' which I presume is financial planner speak for shares. The term is used to make people believe the hedge funds they are investing in is a new asset category, when in reality they are not.


quote:
3) The above excludes funds that promise guaranteed returns (like a few within the OM-IP family) - those are taxed using the actual performance, not the FDR method


All of the OM-IP hedge funds I have read about have this feature. The question is what is the tax treatment of the bonus lock up interest that is dependent on hedge manager performance. If the managers lose money then you only get the guaranteed return and the holding is exempt. If they make money then you get a top up payment and the whole thing comes under the claws of the new FDR regime.

That interpretation doesn't seem reasonable - a grey area?


quote:
4) Most of NZ funds will apply for PIE status but IRD reserves the right of approving or declining such application - final ruling is expected by 1 October 2007


So you won't actually know if your NZ fund is subject to FDR until 1st October, yet you need to decide whether to hold the fund or not by 1st April? That reeks of uncertainty.

[quote]<font size="1" face="Verdana, Arial, Helvetica" id="

Snoopy
06-03-2007, 06:56 PM
quote:Originally posted by OldRider

My undertanding of the OM family of funds is that they are not viewed as share owning funds,
but similarly to cash or fixed interest.

What happens with them is a certain percentage of their funds is given to the guaranteeing bank,this amount together with the interest acrued is sufficient to return the guaranteed amount. The balance is invested in derivatives and the like to get the growth.

As such any capital gain is taxable when the fund closes,thus they would not be a part of this regime any more than is a foreign bond.

My understanding only, do others have a different view?


What you say makes perfect sense Old Rider. But I wonder if the IRD will have the same sense of 'sense' if you see what I mean?

There is nothing in that IRD document Patsy referenced that says what percentage of 'non bond' content a primarily bond fund can have before it is regarded as 'not a bond fund'. The comments that *are* there imply there is 'wriggle room' to sort out the marginal calls. But they don't pin down where the hurdle is.

You may find OM are 'caught out' by not turning over 25% of the total fund (which probably equates to 100% of the hedged bit) every year.

SNOOPY

Tim
06-03-2007, 08:12 PM
What a complicated tax system this will become, I wonder how much they will get?? Cant we have something simple!!!

patsy
06-03-2007, 08:57 PM
A couple of points to clarify:

1) Although the "capital guaranteed" OM-IP funds can be regarded as providing a performance guarantee (i.e., the performance overall will no be negative), the "guaranteed performance" that the legislation refers to applies to the OM-IP that have a 40% minimum performance guarantee over the life of the fund. The rest of the OM-IP will fall within FDR.

2) I believe the OM-IP funds that fall within the FDR are taxed according to the FDR because they are domiciled in the Cook Islands, not because they are hedge funds. It is because, previously, they were caught by the FIF rules.

3) There are a few components of the All Ord and/or ASX500 that are not "companies" as such - e.g., listed funds. A "company" from the perspective of the FDR rules is defined as an entity maintaining a franking account open throughout the tax year. I don;t know if any REIT is part of the ASX500 but if it were, then they'd be FDR caught.

4) Snoopy - the "anything can happen" to Lion Tamer (refer to my previous post), means that they may be whacked with something even worse than the FDR. If you check their web site, you'll see that they report their unit price under a concept called "hold to maturity" price. Without getting into an explanation of what this means, the outcome of their way of valuing units is such that you cannot determine a value as of 01/04/07. To make it worse, some of their funds are linked to fixed interest securities overseas yet even those funds may be caught as well (because the fund does not invest in fixed interest but on options linked to fixed interest rates).

patsy
06-03-2007, 09:02 PM
quote:Originally posted by Snoopy


It looks like most Australian trusts will be caught because they have to 'apply' to NZ IRD for an exemption. I can't see any of them bothering to do that.




I am still awaiting a response from Platinum. Given that they advertise heavily in NZ and target NZ investors quite strongly, I suspect that they'd like PIE status (perhaps, I'm just hoping that it'll be the case)

Snoopy
06-03-2007, 09:46 PM
quote:Originally posted by patsy


3) There are a few components of the All Ord and/or ASX500 that are not "companies" as such - e.g., listed funds. A "company" from the perspective of the FDR rules is defined as an entity maintaining a franking account open throughout the tax year. I don;t know if any REIT is part of the ASX500 but if it were, then they'd be FDR caught.


Ok I know I am going to show my ignorance here, but:

If an entity like Kiwi Income Property Trust can pass imputation credits through to NZ unitholders....

Why cannot an Australian REIT pass franking credits through to Australian unitholders?

SNOOPY

OldRider
07-03-2007, 07:10 AM
Westfield dividend comes from three sources - two trusts and one company, no franking credits from the trusts and tax deducted, franking credits and no tax from the company - 60% franked.

My presumption is that with these stapled securities, distributions from the trust component is a tax deductable cost, so the trusts show no profit, thus have no tax and can have no franking credits.

What will happen here?, perhaps the next step is to only allow companies with 100% franked dividends.

thereslifeafter87
16-03-2007, 12:39 PM
quote:Originally posted by Snoopy


quote:Originally posted by patsy


3) There are a few components of the All Ord and/or ASX500 that are not "companies" as such - e.g., listed funds. A "company" from the perspective of the FDR rules is defined as an entity maintaining a franking account open throughout the tax year. I don;t know if any REIT is part of the ASX500 but if it were, then they'd be FDR caught.


Ok I know I am going to show my ignorance here, but:

If an entity like Kiwi Income Property Trust can pass imputation credits through to NZ unitholders....

Why cannot an Australian REIT pass franking credits through to Australian unitholders?

SNOOPY



Because unit trusts are taxed on a flow-through basis in Australia - much the same as a partnership is taxed here.

thereslifeafter87
16-03-2007, 12:46 PM
The alternative to all this fair dividend rate hoopla is to use the accounting profits method to pay tax under the Foreign Investment Funds rules.

The simplest way to do it is to pay tax based on your holdings at 31 March.

The calculation is simple - multiply your interest in the capital of the company by the net after tax profits of the company, then you get your taxable income.

If you were a trader before because the FIF regime didn't apply, and you are now caught by the removal of the grey list, you are no longer a trader. You are deemed to have no income or expense related to the shares you hold other than those calculated under the calculation method you choose (ie: Accounting profits or Fair Dividend).

With accounting profits there is also no quick sale adjustment as under the fair div regime. The quick sale adjustment deems all your capital gains from the trade to be taxable income.

For those of you thinking about selling all your holdings on 30 March and buying them back on 1 April, there are anti-avoidance provisions in place to prevent that.

Accounting profits will generally get you a better result than fair dividend rate where companies you invest in have a PE greater than 20 or make losses.

You can offset any accounting profits losses against other fif income from the same country, but you are limited to the extent of your economic loss.

EG: The company announces a $1mill loss. Your share of that is $20k, but the market value of your holding only declines by $10k - you only get to claim the $10k loss.

Any questions?

thereslifeafter87
16-03-2007, 04:07 PM
On second consideration it appears more complicated than I originally thought. If you use accounting profits method you are still taxed on any gains from the sale of shares held on revenue account.

Tinker
16-03-2007, 06:50 PM
May I suggest being taxed at your marginal rate on dividends you receive. Seems simple to administer and fair to me. Would also ensure investors were not discouraged from taking risks to grow the productive private sector.

Just a thought.

Cheers
Tinker

thereslifeafter87
19-03-2007, 10:54 AM
quote:Originally posted by Tinker

May I suggest being taxed at your marginal rate on dividends you receive. Seems simple to administer and fair to me. Would also ensure investors were not discouraged from taking risks to grow the productive private sector.

Just a thought.

Cheers
Tinker


The IRD's argument was that companies overseas often pay low dividends. Whether this is true or not is beside the point - they needed the extra revenue in the bank to fund kiwisaver.

thereslifeafter87
20-03-2007, 09:39 AM
quote:Originally posted by aspex


quote:

The IRD's argument was that companies overseas often pay low dividends. Whether this is true or not is beside the point - they needed the extra revenue in the bank to fund kiwisaver.

A really smart idea would be to adapt the new overseas investment rules to the property investors.
How many of them report a taxable income of 5% on the gross value of their property portfolio?

Have a think about it. Revenue galore.[:p]


Haha, actually probably a few people who invest in property overseas might find themselves subject to the 5% rate if they use a corporate holding vehicle in the foreign jurisdiction.

pago
20-03-2007, 08:30 PM
hi guys,its unusual for me to seek advice,but these FDR,FAIR DIVIDEND RATE, rules confuse me.what to do with agm,in the allords,how do i know if agm SHOULD have a franking a/c,how do you tax options, ie in all ords pay divys.what about freebee spinoffs,what cost price does one place on these shares?eg uto.this ird process is a mass confusion,cheers pago.

Deev8
21-03-2007, 03:11 PM
quote:Originally posted by aspex

A really smart idea would be to adapt the new overseas investment rules to the property investors.
How many of them report a taxable income of 5% on the gross value of their property portfolio?

Its only a matter of time until something like that is introduced. The principle of assessing tax based on a fair rate of return has been established now.

Dazza
25-03-2007, 05:40 PM
im with pago eh...

freebie spin offs

options

companies not listed in all ords

etc etc

sigh complicated stuff!

thereslifeafter87
28-03-2007, 08:27 PM
Options shouldn't come within the Foreign Investment Fund (FIF) rules. To have a FIF, you need to have a right in the capital of a company. An option isn't a right in the capital of a company - it is a right to purchase a right in the capital of a company(a fine distinction I know).

If you purchase and sell a share within the same income year, then there is a "quick sale adjustment" which as I understand it, effectively taxes your entire gain (less any costs incurred). In that way, all investors who hold for less than a year will be treated as sharetraders are currently.

Tinker
29-03-2007, 07:51 PM
Life after 87,

Quick sales - not as I understand it. Advice is:


Quick Sales

"Quick Sales" is the term applied where an investment is bought and sold in the same tax year. These transactions are treated separately and calculations can be complex.
They are taxed on the lower of the actual gains on the sales OR 5% of the cost of the shares sold (average cost basis).


Whole things still a dogs breakfast if you ask me - but then again the IRD didn't.

Cheers
Tinker

burtsboy
31-03-2007, 10:08 AM
"Options shouldn't come within the Foreign Investment Fund (FIF) rules. To have a FIF, you need to have a right in the capital of a company. An option isn't a right in the capital of a company - it is a right to purchase a right in the capital of a company(a fine distinction I know)."
-------------------------------------------------

If this is true for options then what about listed warrants on the London Stock Exchange?

Also heaps of instalment warrants (both put and call) on the ASX, how are these investments to be treated?

Looks like some of my overseas investmenrs will be free of FDR/Captal Gains Tax.

mamos
05-04-2007, 10:10 PM
Can you opt into the FDR regime if you are a trader and are under the $50,000 threshold.


Thanks

M

mamos
07-04-2007, 05:45 PM
I have read that and I know that it is potentially advantageous for traders to be taxed under the FDR regime rather than the old regime.

It appears from her article that you can't opt in if you are investing in NZ or All ordinaries listed shares, or if you are below the $50,000 de minimus threshold.

Mick100
17-04-2007, 11:01 PM
Question

Where does an ASX listed company with operations overseas (outside australia) fit into the scheme of things with regards to cap gains tax.
.

Snoopy
18-04-2007, 10:33 AM
quote:Originally posted by Mick100

Question

Where does an ASX listed company with operations overseas (outside australia) fit into the scheme of things with regards to cap gains tax.


Firstly the new tax regime is NOT a capital gains tax. It is a Wealth tax In Lieu of a Dividend and Capital gain tax Above a Threshold. That makes it something entirely different, a 'WILDCAT' tax if you accept my acronym.

Secondly where a company is *listed* is not relevant. It is where the company is domiciled that matters. For example James Hardie has its primary listing and extensive operations in Australia but is domiciled in the Netherlands, and so comes under the new tax regime.

BHP Billiton is an interesting case because it is 'dual listed' in both Australia and the UK. If you hold UK domiciled BHP shares and receive your dividends in pounds then these shares fall under the new regime. If you hold the same shares in Australia and receive Aussie dollar dividends then these shares do not fall under the new regime.

The principal requirement for an Australian company to be exempt is that they run an Australian franking credits account. My interpretation is that if such an Australian company expands with overseas sales to the extent that their dividends are no longer fully franked, that does not disqualify them from being exempt from the new tax regime because principally they still pay their tax in Australia.
If however they were to relocate overseas, like Newscorp, then such a company would lose their tax exempt status.

Does that cover things?

SNOOPY

Mick100
18-04-2007, 01:25 PM
quote:Originally posted by Snoopy
[

Does that cover things?

SNOOPY






That covers it

Thanks Snoopy
,

Dazza
13-05-2007, 03:37 PM
how would buying managed funds from australia work on the new laws?

moimoi
14-05-2007, 10:36 PM
Dazza,

as i understand it you would now be better off buying a NZ fund that invests in Oz, and then ensure that said fund is registering for "PIE" status.

PIE commences in Oct 07...effectively means that actively managed funds will not pay capital gains taxes on their trading anymore and their tax payable will be capped to 33%. It is expected that this will increase the returns for active funds.

cheers
moi

Discl: I ain't no boffin. So check yourself.

Snoopy
25-07-2007, 08:58 PM
quote:Originally posted by Snoopy


Problem Part 5 (WILDCAT September 2006 proposal)

The share price was $US37.99 and the exchange rate is $1US=65.75c at the start of FY2005. At the end of FY2005 the share price was $US51.81 and the exchange rate was $1US=70.70c

During FY2005 ‘Yum Restaurants International’ started paying dividends for the first time.
These dividends were at the rate of 10c per share, making a gross total of $20 per dividend payment. Withholding tax was deducted at a rate of 15%. That works out at $3 per dividend payment, leaving a net return of $17. Dividends were paid on three dates during FY2005. These dates accompanied by the $NZ/$US exchange rate on the day follow:

Div payment date 1: 6th August 2004; $NZ1=US64.47c
Div payment date 2: 5th November 2004; $NZ1=US69.05c
Div payment date 3: 4th February 2005; $NZ1=US71.02c

Once again ‘I’ makes no further share purchases or share sales during the year. What is ‘I’ tax liability for FY2005, due to owning these ‘Yum Restaurants International’ shares?

The ‘Fair Dividend rate’: 0.05x(V-V1) is

0.05x(200x37.99)/0.6575 = $NZ577.79

The total actual dividend income, including all withholding tax is :

(20/0.6447 + 20/0.6905 + 20/0.7102)= $NZ88.15

Clearly this is below the ‘Fair Dividend rate’, yet some US withholding tax -that is recognized in NZ as part of a dual taxation agreement, has already been paid, specifically:

($US3/0.6447 + $US3/0.6905 + $US3/0.7102)= $NZ13.22

We can use that tax already paid to offset tax that is deemed due under the ‘Fair Dividend rate’ method.

(200x$US51.50)/0.7070 - (200x$US37.99)/0.6575 = $NZ3012.71

Clearly this gain is larger than our fair dividend rate

Based on a tax rate of 33%, ‘I’s tax liability is:

0.33 x $NZ577.79= $NZ190.67

But some of that tax has already been paid in the USA. That leaves the net amount of tax to pay as:

$NZ190.67-$NZ13.22=$NZ177.45

(end of workings showing WILDCAT method in action)

SNOOPY


This is just an update on the Cullen Dunne tax proposal as it was legislated. The main difference between what was legislated and the September 2006 proposal that I examined in page 2 of this thread concerns the treatment of dividends.

In the legislated proposal, the dividend is considered as part of the overall capital return used to check if a gain has really been made at the end of the year. This only changes what happens to companies that pay dividends. That means the only step in my problem that changes compared to my previous example is 'Problem Part 5'. So let's see what happens with the legislation as drafted.

The ‘Fair Dividend rate’ is:

0.05x(200x37.99)/0.6575 = $NZ577.79

The actual return for FY

(200x51.81)/0.7070c-(200x37.99)/0.6575
+(20/0.6447 + 20/0.6905 + 20/0.7102)= $NZ3188.55

Clearly that return is positive, so we can't get out of paying the tax (the provision not to tax losses is not applicable). The actual total return is also greater than the Fair Dividend Rate. So we have to pay tax on the fair dividend rate amount. Assuming a tax rate of 33%, the tax payable is:

0.33x$NZ577.79= $NZ190.67

Yet some of that tax has already been pre-deducted as witholding tax in the United States.

($US3/0.6447 + $US3/0.6905 + $US3/0.7102)= $NZ13.22

So the actual tax payable is: $NZ190.67-$NZ13.22= $NZ177.45

Note that this is exactly the same tax payable as in the September 2006 proposal.

Doing it this way solves the problem of where you declare your overseas dividends in your tax return. The answer is you don't declare the dividends as dividends, unless those dividends exceed the 5% 'deemed return' once you take into account the effect of share price decline (if any) during the year.

You do however declare any 'witholding tax paid' overseas as this can be used to offset any tax payable on your '