Foreign Investment Fund (FIF) taxes

[Ricky99]

Hi - do any other kiwi's get stung with this every year and get a little peeved off by it? Was considering now whether I gift all my shares into a trust (now that gifting is "free") and then pay the revenue (FIF revenue) out to my two year old son every year so that the income gets taxed at a far lower tax rate. Anybody else trying to work out better ways of minimising their FIF exposure?

[Lizard]

I like FIF. Don't have to worry about deciding whether I'm a trader or an investor in my intention. Tax is very low when compared to what trading in these shares would cost me.

[Aaron]

The FIF rules were to get some tax from investments in Amercia where they don't pay much in dividends and look for capital growth. If we had a comprehensive capital gains tax we could do away with this altogether the sting might be worse though.
Ricky99 your lucky to have been stung with this every year as a lot of people would have paid nothing using the CV method during the turbulent times. If you can find a FIF investment that pays a 10% dividend you can get 5% tax free assuming it doesn't change in value from year to year.
I would check with your accountant as I think you will find an underage/minor beneficiary will be on a very high tax rate.

[Snoopy]

Hi - do any other kiwi's get stung with this every year and get a little peeved off by it?


Yes I am peeved by the system, and I think it is intellectually flawed. However there is a legitimate legal way around it. Get your overseas exposure by buying exporters based in NZ and Australia (listed on NZX and ASX) who sell into world markets. Don't buy stuff listed outside the NZX and ASX.



Was considering now whether I gift all my shares into a trust (now that gifting is "free") and then pay the revenue (FIF revenue) out to my two year old son every year so that the income gets taxed at a far lower tax rate. Anybody else trying to work out better ways of minimising their FIF exposure?


I don't think that plan would work. An NZ trust is still a legal entity that would have to pay the FIF tax. Whether or not you paid any of that trust 'income' (which contains no imputation credits) onto a third party would not affect the amount of tax your trust paid, I would have thought. In fact you may even increase your tax liability by doing this.

SNOOPY

[Anonymous]

I like FIF. Don't have to worry about deciding whether I'm a trader or an investor in my intention. Tax is very low when compared to what trading in these shares would cost me.

Lizard, just to clarify, has FIF done away completely with the whole trader/investor issue? i.e one can now trade as much as desired and only pay FIF 'capital gains' tax?

[Ricky99]

It just seems so random that you have companies in the ASX 300 that never pay dividends that are exempt and then companies outside the ASX 300 that pay dividends that are included...

also peeves me that we pay capital gains but you can play in the real estate market without paying it (although am happy that the depreciation on housing is gone!)

[Lizard]

Lizard, just to clarify, has FIF done away completely with the whole trader/investor issue? i.e one can now trade as much as desired and only pay FIF 'capital gains' tax?

My understanding is that there is no trader/investor distinction for investments under the FIF rules. Both require you to use one of the available options to determine income - which for the individual roughly boils down to comparative value (as you would pay with capital gains, but no losses) or Fair Divdend Rate which assumes you made 5% pa (or 5% per trade on quick sales). The only people likely to end up paying more tax under FIF than on exempt shares are those who consistently make losses or those who buy and hold non-dividend or low-dividend speculative stocks (and therefore are more than likely investing with the intent of making a capital gain and therefore arguably should be paying tax as though trading anyway).

However, it doesn't do away with trading altogether as there are many exempt stocks that can be traded (i.e. NZ incorporated companies and most ASX all-Ords) and also those individuals who don't meet the $50k per person de minimus (based on purchase price) would still be considered to be trading if they acquired with intent to make a gain on sale.

The only thing I don't like about FIF is that it makes recording complex because the records need to be kept a bit differently, so end up with lots of different types of investments recorded in different ways. Personally, I'd prefer a low Fair Dividend Rate on everything rather than CGT, as I think it is less distortionary and rewards investors for making a good return on their capital - which would tend to encourage wise investment. If there is one downside to that, it would be that because no losses can be claimed, it is not such a good way to get long term investment in ventures that are likely to be loss-making in the early years.

[Anonymous]

Thanks Lizard. I guess my question is, does the investor/trader distinction apply to each share individually or the portfolio as a whole? I.e. as you say, for FIF shares you are now paying income tax on CV/FDR regardless so you can trade as frequently as you want. But if you do trade these stocks frequently does that then tarnish the rest of your portfolio and therefore make your FIF exempt NZX/ASX 300 stocks subject to CGT as well, even if these are long-term investments?

[Jay]

One thing to note where FIF is not applicable we do not pay CGT - The profit you make on the sale of shares is deemed income- appears to the same thing but is not for a number of reasons.
I am also not sure on whether FIF threshold applies per share or your collective holdings as at the start of the tax year?

[Snapper]

If a trust pays out more than a $1000 income to a minor beneficiary then the amount over $1000 is taxed at 33% (unless the trust is a testamentary trust or there are other special circumstances). As far as the FIF regime goes I bet its resulted in a net tax loss for the govt so far.

[Lizard]

Thanks Lizard. I guess my question is, does the investor/trader distinction apply to each share individually or the portfolio as a whole? I.e. as you say, for FIF shares you are now paying income tax on CV/FDR regardless so you can trade as frequently as you want. But if you do trade these stocks frequently does that then tarnish the rest of your portfolio and therefore make your FIF exempt NZX/ASX 300 stocks subject to CGT as well, even if these are long-term investments?

It is not definitive (anyone been audited?), but I would guess most of us would separate our trading and investing activities in some way - often by use of separate on-line accounts or brokers, but, at the very minimum, by separate record keeping (handwritten log maybe more convincing than more easily edited computer versions). From my own perspective, I have both FIF and exempt shares in both trading and investing portfolios, although mostly my trading is in volatile spec small caps and so they tend towards FIF. In the end, until audited, I can't know how IRD would treat this, but it seems a common enough practice and I think unlikely to be a target for IRD. (I have gone to a few lengths, including getting a letter some years ago from IRD re their view on use of separate brokers. Suitably vague/hedged, but could be interpreted as acceptable to them.) So I guess I am saying you can probably avoid tainting but it is best to clearly identify trading shares separately, in a separate or sub-portfolio. Making it too clean-cut between FIF for trading and Exempt for investing could be a bit provocative on the tax-minimisation front, so it would be good if you have thought through your reasons for doing so.


One thing to note where FIF is not applicable we do not pay CGT - The profit you make on the sale of shares is deemed income- appears to the same thing but is not for a number of reasons.
I am also not sure on whether FIF threshold applies per share or your collective holdings as at the start of the tax year?

FIF threshold is on collective holdings and I think applies if you cross the threshold during the year too - even though the holdings you buy during the year may not be counted in your FDR calculation for that year (unless you sell them again and trigger the quick sale rule). Note that it is based on the price you purchased the holding for - which complicates things if you are close to the line. The only thing I am a bit vague on is whether 5 sequential $10k trades in FIF shares during the year, using the same starting funds would then trigger FIF (given my understanding is they are each counted as having a deemed return of 5%, even though held for only part of the year.)

As you say, it is these kinds of exemptions etc that can make it a bit unwieldy. Hard to imagine IRD would want to audit all but the biggest fish on this though - and not going to be looking for small errors in understanding. Still wonder how many accounting companies can correctly handle FIF calculations (I was using one of the big accounting firms for one portfolio, but I think they relied heavily on my assessment - certainly never asked me to produce any contract notes.)

[Jay]

Thanks Lizard

One thing still confuses me
If you are deemed to be trrading or indeed file you tax return on that basis, then does FIF apply, or can you apply it on the shares that qualify and the ones that don't file as per normal trading.
I think this is what you seem to be saying Liz??


Re: The only thing I am a bit vague on is whether 5 sequential $10k trades in FIF shares during the year, using the same starting funds would then trigger FIF - I have only ever filed on the basis of Trading and count as income the capital gain made if any, my accountant has never said otherwise.

[Lizard]

Thanks Lizard

One thing still confuses me
If you are deemed to be trading or indeed file you tax return on that basis, then does FIF apply, or can you apply it on the shares that qualify and the ones that don't file as per normal trading.
I think this is what you seem to be saying Liz??


Re: The only thing I am a bit vague on is whether 5 sequential $10k trades in FIF shares during the year, using the same starting funds would then trigger FIF - I have only ever filed on the basis of Trading and count as income the capital gain made if any, my accountant has never said otherwise.

My understanding is that FIF is always FIF and not segregated between trading and investing. The IRD web-site would give the answer that you do have FIF income:
http://www.ird.govt.nz/toii/fif/workout/

However, trading is pretty similar using the comparative value method - the main difference being in timing of tax payment and in the ability to claim a loss (not possible under FIF). The main difference would be if you make more than 5% per trade average, then you may be overpaying tax vs using FDR method, but if you make a loss FIF will not allow you to claim it. (NB: Rules are slightly different if you trade via a company rather than as an individual.)

[Anonymous]

My understanding is that FIF is always FIF and not segregated between trading and investing. The IRD web-site would give the answer that you do have FIF income:
http://www.ird.govt.nz/toii/fif/workout/

However, trading is pretty similar using the comparative value method - the main difference being in timing of tax payment and in the ability to claim a loss (not possible under FIF). The main difference would be if you make more than 5% per trade average, then you may be overpaying tax vs using FDR method, but if you make a loss FIF will not allow you to claim it. (NB: Rules are slightly different if you trade via a company rather than as an individual.)

Thanks Jay and Lizard. Yes keeping separate portfolios seems to be the obvious answer. But as you say, most people would own both FIF and FIF exempt shares in both their 'trading' and 'investor' portfolios. So therefore you have to calculate your FIF tax across both portfolios and then your income tax on your trading portfolio only. That leads to Jay's question which is what I was trying to get at.

I hope the answer is not that you have to pay FIF tax regardless and then also income tax on your trading portfolio so essentially paying two taxes on the income on FIF shares in a trading portfolio.

Lizard, I don't believe (but am obviously certainly not sure) that 5 consecutive $10k trades would trigger FIF as my understanding is that it is calculated on the peak cost price of FIF shares held on any one date during the year (at least that is how sharesight seems to calculate it).

[Lizard]

I hope the answer is not that you have to pay FIF tax regardless and then also income tax on your trading portfolio so essentially paying two taxes on the income on FIF shares in a trading portfolio.

No, that would not be the case. You would separate the FIF shares and calculate income for them separately. So effectively three different ways of paying tax - Exempt shares invested are paid on dividends, FIF shares (mostly) paid on either FDR or comparative value, and Exempt shares traded are paid on total profit/loss at time of sale.


Lizard, I don't believe (but am obviously certainly not sure) that 5 consecutive $10k trades would trigger FIF as my understanding is that it is calculated on the peak cost price of FIF shares held on any one date during the year (at least that is how sharesight seems to calculate it).

Thanks! Yes, that makes sense - although creates another whole set of record keeping for traders in the process if you happen to be sitting anywhere near the de minimus. Sharesight would be an advantage at that point if it can calculate it!

The only significant way I have ever thought might be able to be used to reduce FDR income would be to sell half the portfolio every year close to year end and buy just after the new year (holding for about 23 months). That way, you would effectively only pay FDR on about half the money you have for investment, while still having most of it in the market for most of the time.

The other more dubious way (if sure of paying FDR) might be to review holdings bought during the year and, if in a loss position, turn them into a Quick Sale so that Quick Sales profit falls below 5% and moves into Comparative Value..(would not do this if the quick sales would stay in the FDR, as it would increase the tax!) That way the income on the quick sales portion could be reduced to as little as $0 (no loss though). If the funds were not re-invested until the following year, then they might also avoid being counted in FDR income for the following year (unless once again become a Quick Sale).

However, this is academic only. Anything that involves making trading decisions for tax purposes is very likely to cost you more in the long run!

[Anonymous]

Thanks! Yes, that makes sense - although creates another whole set of record keeping for traders in the process if you happen to be sitting anywhere near the de minimus. Sharesight would be an advantage at that point if it can calculate it!

I have just had a play around with Sharesight and it definitely calculates your FIF eligibility based on your peak balance of FIF shares based on cost price on the highest day of the year. There is also this video on how it calculates FIF with regard to both FDR & CV and also how it handles quick sales if you haven't already seen it: http://www.sharesight.co.nz/tour/fif_report/

[Lizard]

I have just had a play around with Sharesight and it definitely calculates your FIF eligibility based on your peak balance of FIF shares based on cost price on the highest day of the year. There is also this video on how it calculates FIF with regard to both FDR & CV and also how it handles quick sales if you haven't already seen it: http://www.sharesight.co.nz/tour/fif_report/

That video looks good. Same result as I get, but theirs would be much easier than trying to keep a spreadsheet for complex trades! Quite impressed with the level of info in Sharesight from what I'm seeing there now and am going to seriously consider using the subscribed version to save some time and decrease chance of errors for the 2 portfolios I have in FIF. Biggest hurdle will be the time required to get all the initial holdings in there.

[Jay]

Appreciate your thoughts Lizards

Why do they make it so hard to work out for average Joe/Josephine
Surely the harder it is to workout the more likelihood of the "crafty" finding loopholes.

[Anonymous]

Yeah, I think they are good. Not cheap but cheaper than the accountant which is my only other option. They are continuing to develop which is also good. To set it up you only really need to enter the buy & sell trades as all divi's, split's capital returns etc propagate automatically (although you might want to double check depending on how many years back you are going). Plus, if you still have the pdf contracts you can email them through to your portfolio address which sharesight creates and it will automatically enter the buy or sell trade as well which could save you time setting up.

[Lizard]

Appreciate your thoughts Lizards

Why do they make it so hard to work out for average Joe/Josephine
Surely the harder it is to workout the more likelihood of the "crafty" finding loopholes.

Actually, I think it is very hard to find useful loopholes in FDR. The only reason it is so complicated is that everyone argued for so many exemptions to get it accepted. Otherwise would not have comparative value method, exempt Aussie shares or de minimus levels. I've said it elsewhere, but still like the idea of FDR on everything - including the house - though possibly at a lower rate to allow for some inflation. That would be extremely simple - add up your assets at the start of the year (including cash) and multiply by the FDR rate to get your investment income. How easy is that? :)

If we want to do an exemption, do an exemption on the first $10k pa of Investment Income rather than on the assets.

[Lizard]

Plus, if you still have the pdf contracts you can email them through to your portfolio address which sharesight creates and it will automatically enter the buy or sell trade as well which could save you time setting up.

Sounds better and better! :)

[Jay]

. I've said it elsewhere, but still like the idea of FDR on everything - including the house - though possibly at a lower rate to allow for some inflation. That would be extremely simple - add up your assets at the start of the year (including cash) and multiply by the FDR rate to get your investment income. How easy is that? :)

If we want to do an exemption, do an exemption on the first $10k pa of Investment Income rather than on the assets.

Agree , make things a lot simpler rather than the now working out at least 2 sets of income each for a trading and Investment portfolios

[Ricky99]

Luckily today the ASX rebalance has put Neon into the ASX 300 so the majority of my portfolio now is in the ASX 300 and exempt. Strange how a share doesn't change (still in growth phase no chance of a dividend any time soon) and yet they are now exempt. I think for the rest I will just gift them to my wife who is about to take a year off work and they can be her only income and be taxed at the lowest tax rate.

The change in the gifting laws has been a godsend...

[tobo]

Ricky, I recall struggling to understand a clause in the FIF rules that says you still have to include an Exempt company if it was not exempt when you first bought shares in that company.
The rule seemed to suggest that after the company passed into the All Ords (or ASX300) it was still not exempt for me if I first started investing in that company earlier.
Thinking about it further, surely they are only talking about the year when the company joins the All Ords, so the following year I would treat my holdings as exempt. Otherwise, it would seem silly to keep paying FIF year after year on a company that grew bigger and bigger and started paying dividends. (My situation is long term investor, so I might hold them for 3 years before they join All Ords, then might hold them for a few years longer.)

[voltage]

great calculator on www.fifcalculator.co.nz cost $50 per annum

[tobo]

Lizard said (about 4 months ago)

My understanding is that FIF is always FIF and not segregated between trading and investing. The IRD web-site would give the answer that you do have FIF income:
http://www.ird.govt.nz/toii/fif/workout/


In the IRD website they keep using the the word "investment". (EG, do you have an investment in ... shares).
They then (helpfully) define the term "capital account" in the FIF definitions section, but not the word "investment".
And I do not see them anywhere using the term "capital account". They just keep using the word "investment".

It is no wonder we are confused.
(I tried to ask the IRD last year for several FIF clarifications (like, can Options be FIFs. I think they cannot, because the IRD uses the word shares, and maybe they think there can be no such thing as an investment in options because you'd only buy options to resell at a profit). Anyway, When I tried to ask the IRD last year for FIF clarifications, they replied that they do not answer questions and that I should ask an accountant. (I think that was code for "we have no idea either".) Well, surely an accountant is only going to look at the same information that we can see.

Anyway, it appears that we just have to guess an interpretation, but if there is anyone out there who atually works on this kind of stuff, it would be good to get your interpretation on whether trading junior ASX shares would be a FIF or not.
Say you make a huge gain. You could limit your taxable income to 5% if applying the FIF rules.
(Lately some volatile shares have been jumping up and down 10% or more within just a few weeks...not that I can time these things right!)

[tobo]

Oh, it has just occurred to me that maybe if you apply the short holding adjustments (or whatever they call them) it is all going to work out the same as full trading profit. Is it? (I have only held long term, so have not really studied those adjustments calculations)