Overseas Cash Markets

[MrMonkey]

Just wanting to get some ground info on if there are any gains to be made in overseas bank account term deposits or bonds ie in Australia or further afield?

[MrMonkey]

anyone?? hello?

[POSSUM THE CAT]

Mr Monkey send me a PM if you wish to go further in private with Australia. I do not wish to air personal banking solutions here that may not be relevant to your needs & amounts you have to play with. Otherwise check the banks web sites even which Sharebroker you deal with has a big bearing on the benefits of this.

[MrMonkey]

What I kinda want to know if it is beneficial at all in putting cash in term deposits in Australian banks over NZ banks given their deposit guarantee scheme and also the higher rate of return and currency turn around. QUestions are is this any good, do you make enough out of it once its back in NZD to be deemed worthwhile and what tax is incurred on such interest earned offshore bought back to NZ?

[Halebop]

What I kinda want to know if it is beneficial at all in putting cash in term deposits in Australian banks over NZ banks given their deposit guarantee scheme and also the higher rate of return and currency turn around. QUestions are is this any good, do you make enough out of it once its back in NZD to be deemed worthwhile and what tax is incurred on such interest earned offshore bought back to NZ?

It's beneficial if you make a return commensurate with the risk you are taking. Can you estimate your currency gain or loss and the relative risk you are taking? If you want to follow this route you are probably better off looking at the nzd/aud cross rate from a technical perspective. There are also tax ramifications with currency gains and losses.

[POSSUM THE CAT]

Mr Monkey You pay 10% with holding TAX in Australia & this becomes a tax credit in NZ the big necessity is an efficient way of transferring money to and from using wholesale rates or very close to wholesale rates otherwise in my opinion there is no benefit you could be possibly worse off.

[Hoop]

Hi Mr Monkey

Have a look at Direct Broking's online multi-currency account.... https://www.directbroking.co.nz/DirectTrade/static/omcaintro.aspx

[MrMonkey]

So (in simple terms) would you say its worth putting cash in a ANZ term deposit in AUS rather than ANZ NZ if we were to compare apples with aporo?

[GTM 3442]

It is worth diversifying across institutions, currencies, and geographies.

It costs you money to do this.

Think of it as an insurance premium.

Many people insure their house against the extremely low-probability event of burning down.

[Snoopy]

What I kinda want to know if it is beneficial at all in putting cash in term deposits in Australian banks over NZ banks given their deposit guarantee scheme and also the higher rate of return and currency turn around. Questions are is this any good, do you make enough out of it once its back in NZD to be deemed worthwhile and what tax is incurred on such interest earned offshore bought back to NZ?

I am guessing, Mr Monkey, that this question has arisen because for about the first time in 'our' investment history interest rates are higher in Australia than New Zealand. Consequently to boost fixed interest income, which in NZ today is probably only matching inflation, should you put some of your money in Australia to get an (Australian) government guaranteed higher return?

The first thing is I don't think the government guarantee in Oz makes a practical difference compared to equivalent bank deposits that are not guaranteed in NZ. I think if the worst happened it would be politically untenable for the small depositor in NZ to be left out of pocket due to bank failure. I think the NZ government would step in.

A risk is that should Australian interest rates fall, then the Australian dollar could get weaker. That would mean less capital (in NZ dollar terms) to repatriate when you finally bring that capital back to NZ.

The next thing that will eat into your $NZ returns is bank fees. In effect for Mum & Dad size parcels of money you are looking at a 2% charge on your capital (paid for through the difference in the buy and sell currency quotes) when shifting from currency to currency. That effectively adds a one off 4% capital charge by the time you put money into Australia and take it out again.

As Halebop has hinted, a fixed interest investment overseas is regarded as a 'scheme of arrangement' by the NZ IRD. That means you will have to pay tax on any capital gain even if you are a Mom & Dad investor doing a one off thing. Nevertheless to balance that negative, any capital loss you might make on the same overseas term deposit is tax deductable in the end.

As Possum has said, the standard rate of withholding tax is 10% in Australia, if you are an overseas account holder. This 10% however can be claimed on your tax return as counting towards the eventual tax bill your investment incurs from a New Zealand perspective. So not really an issue.

The secret to making this idea work IMO, would be to have a very long term time horizon, say ten years, that would minimise the effect of those currency conversion charges on your overall return. Exchange rate losses are a real risk. But because NZ and Oz are both commodity trading countries at the bottom of the world, the NZD/AUD volatility over the long term is IME likely to be lower than any other currency you would like to pair with the NZD.

IMO this would be quite a good diversification for the NZ fixed interest investor, provided you can live with the very long term strategy I have outlined.

Your final point about the whole thing being worthwhile is where my answer goes off on a tangent to your original question. My preference is for a portfolio of high yielding NZ shares as the best way to secure an income stream. So my personal view is that there are better ways to produce a higher fixed income steam than chasing higher interest rates in Australia. However, if you are talking of making fixed interest in New Zealand the core of your fixed income strategy I wouldn't consider that worthwhile either. Nevertheless what is worthwhile can be a very personal thing. YMMV.

SNOOPY

[MrMonkey]

I am guessing, Mr Monkey, that this question has arisen because for about the first time in 'our' investment history interest rates are higher in Australia than New Zealand. Consequently to boost fixed interest income, which in NZ today is probably only matching inflation, should you put some of your money in Australia to get an (Australian) government guaranteed higher return?

The first thing is I don't think the government guarantee in Oz makes a practical difference compared to equivalent bank deposits that are not guaranteed in NZ. I think if the worst happened it would be politically untenable for the small depositor in NZ to be left out of pocket due to bank failure. I think the NZ government would step in.

A risk is that should Australian interest rates fall, then the Australian dollar could get weaker. That would mean less capital (in NZ dollar terms) to repatriate when you finally bring that capital back to NZ.

The next thing that will eat into your $NZ returns is bank fees. In effect for Mum & Dad size parcels of money you are looking at a 2% charge on your capital (paid for through the difference in the buy and sell currency quotes) when shifting from currency to currency. That effectively adds a one off 4% capital charge by the time you put money into Australia and take it out again.

As Halebop has hinted, a fixed interest investment overseas is regarded as a 'scheme of arrangement' by the NZ IRD. That means you will have to pay tax on any capital gain even if you are a Mom & Dad investor doing a one off thing. Nevertheless to balance that negative, any capital loss you might make on the same overseas term deposit is tax deductable in the end.

As Possum has said, the standard rate of withholding tax is 10% in Australia, if you are an overseas account holder. This 10% however can be claimed on your tax return as counting towards the eventual tax bill your investment incurs from a New Zealand perspective. So not really an issue.

The secret to making this idea work IMO, would be to have a very long term time horizon, say ten years, that would minimise the effect of those currency conversion charges on your overall return. Exchange rate losses are a real risk. But because NZ and Oz are both commodity trading countries at the bottom of the world, the NZD/AUD volatility over the long term is IME likely to be lower than any other currency you would like to pair with the NZD.

IMO this would be quite a good diversification for the NZ fixed interest investor, provided you can live with the very long term strategy I have outlined.

Your final point about the whole thing being worthwhile is where my answer goes off on a tangent to your original question. My preference is for a portfolio of high yielding NZ shares as the best way to secure an income stream. So my personal view is that there are better ways to produce a higher fixed income steam than chasing higher interest rates in Australia. However, if you are talking of making fixed interest in New Zealand the core of your fixed income strategy I wouldn't consider that worthwhile either. Nevertheless what is worthwhile can be a very personal thing. YMMV.

SNOOPY


Cheers Snoopy, answers the question perfectly.