What to do with foreign dividends

[ENP]

I own some New Zealand, Australian and recently bought some American shares.

I have both a NZD and AUD account where I put my dividends into when I receive them. This isn’t a big issue as I normally buy shares in lots of $3-4k to get brokerage below 1%

However, with my USD dividends that I will start receiving soon, the brokerage is slightly higher so I’m buying in lots of $15k or so to keep brokerage down below that 1% level.

Here comes my dilemma…

Do I put these dividends ($400-500 per year) into a separate foreign currency account and leave it there earning 0% interest. Or do I move it into a local currency account where I can earn 3-4% interest on it. I know I’ll lose out on the foreign exchange spread if I move it back and forth too often. However, since it takes me 18 months or so to save up to buy one lot of US shares and then I may wait a bit until something I like becomes good value to buy, it may be sitting in mu USD account earning 0% interest for 2+ years doing essentially nothing.

For those who invest in US, UK or other overseas markets directly, what do you do with your foreign dividends?

Thanks

Elliot.

[Sauce]

Hi ENP

If you are confident you will continue to purchase shares overseas in that currency then I would leave it in the foreign currency account. The spread will make sending it back and forth not worth it - once you take off tax on the interest and the spread paid on the transfers it would have to be a very long time to make it worth it. And then you are exposed to the exchange uncertainty of the exhange rate fluctuations as well.

If you do transfer funds use Orbit Remit - they are an excellent low cost provider. For large amounts you can negotiate even better rates, but they are always way cheaper than the banks. I have used them for AUD to NZD and AUD to USD and couldn't be happier with the service and the rate.

Also, be very conscious of your tax obligations. Dividends from overseas shares is taxable income. And any shares you buy in the US, and many in AUS, will be subject to the foreign investment tax in addition to that. The foreign investment tax is a ruthless capital gains tax (much worse than the capital gains tax paid by US residents for instance).

I hope this helps

Regards,

Sauce

[CJ]

Also, be very conscious of your tax obligations. Dividends from overseas shares is taxable income. And any shares you buy in the US, and many in AUS, will be subject to the foreign investment tax in addition to that. The foreign investment tax is a ruthless capital gains tax (much worse than the capital gains tax paid by US residents for instance). Subject to the $50k deminimus which I assume he is still within.

Overseas shares can be a tax mine feild. Something else for you to research.

[Sauce]

Yes, your right of course. Cheers CJ.

It is a very dirty tax in my opinion. Over many years you could end up paying more in tax than your total capital invested if it fluctuated in the right manner !

Sauce

[ENP]

Yes, your right of course. Cheers CJ.

It is a very dirty tax in my opinion. Over many years you could end up paying more in tax than your total capital invested if it fluctuated in the right manner !

Sauce

Where do I find out more info?

IRD ?

[Snoopy]

For those who invest in US, UK or other overseas markets directly, what do you do with your foreign dividends?


I own only one US listed share, YUM Brands. I ordered my broker to transfer them into my own name so I save the local broker annual management fees . Then I found out YUM have a dividend reinvestment scheme. So I just compound the dividends.

There may be a problem with doing this if I have to sell my shares quickly. However, since I can't envisage such a situation occurring I haven't needed to find a way to get my money back yet.

SNOOPY

[Sauce]

Yep

If you google Foreign Investment Fund tax there should be plenty that comes up - always best to go straight to the source, so IRD website certainly the best place. There is a 50k threshold under which it is not applicable as CJ wisely pointed out.

Your overseas dividends will be taxed at your personal tax rate (assuming you own the shares personally).

Cheers

Sauce

[Sauce]

P.s. I called it a capital gains tax. Technically its the "fair dividend model" (as termed by the IRD) and not a true CGT. It is in fact worse than the CGT that the US have for instance. But many people don't understand the maths and are fooled by the seemingly small annual percentage.

And I should clarify that normal dividends will be taxed regardless of the size of your portfolio. Which sucks because you are getting taxed twice; at the company level in the country of origin and then again in NZ.

Cheers

[Lizard]

P.s. I called it a capital gains tax. Technically its the "fair dividend model" (as termed by the IRD) and not a true CGT. It is in fact much worse than the CGT that the US have for instance. But most people don't understand the maths and are fooled by the seeming small annual percentage.

Cheers

For an individual, who doesn't pay tax in years when shares lose money, FDR has probably cost less in tax than they would have paid otherwise. There have been plenty of FIF regime shares around paying divs greater than 5%, even without franking.

[Sauce]

Hi Liz

The problem is the cumulative, compound effect, over long periods of time.

The tax is a real disincentive to investing overseas.

Cheers

Sauce

[Snoopy]

P.s. I called it a capital gains tax. Technically its the "fair dividend model" (as termed by the IRD) and not a true CGT. It is in fact worse than the CGT that the US have for instance. But many people don't understand the maths and are fooled by the seemingly small annual percentage.

And I should clarify that normal dividends will be taxed regardless of the size of your portfolio. Which sucks because you are getting taxed twice; at the company level in the country of origin and then again in NZ.


The FIF regime isn't quite as bad as you paint it Sauce. Once you are over that $50,000 capital buy in amount, dividends are not taxed separately from capital. A dividend gain effectively becomes part of the whole year capital gain for FIF tax purposes.

And US tax witheld in the USA can be offset against your FIF tax bill in New Zealand. Your impression that US dividends are somehow 'double taxed' is not right.

SNOOPY

[RRR]

I am sure Snoopy is right - FDR assumes that if total investment is more than 50K, 5% of the total investment is your income and then taxed at the individual tax rate. If you pay tax overseas, you can claim deduction for an equivalent amount.

I am unsure about fixed income investments and income from properties owned overseas? Does any one have an idea?

[OldRider]

RRR
I don't know about property, but for fixed income investments, together with cash held
in a foreign currency, tax is paid in NZ on the interest return, with a deduction for the tax
already paid overseas. Further to this, the value of those investments needs to be revalued each
year, if the value has increased this amount is added to your income and taxed, if it has decreased
your income is reduced accordingly. I am not an accountant, just repeating what my accountant tells me needs to be done and how it is handled in my accounts. There is in the accounts a line --
foreign exchanges losses/gains.

It sems to be an inaccurate measure simply using the end of year
balances, maybe needs to be watched if a large transaction occurs right at years end as balance is assumed to have been there all year.

[Sauce]

The FIF regime isn't quite as bad as you paint it Sauce.
SNOOPY

Hi Snoopy

The FIF is like a sheep in wolfs clothing relative to the US CGT. Here is a highly oversimplified way to look at it but the point should at least be clearer than my previous post: Would you rather pay 1.65% compounding over a lifetime or would you rather pay a one off 15% lump sum on your capital gain when you realise it?

Regards,

Sauce

[RRR]

Thanks OldRider - very helpful.

[Lizard]

RRR
I don't know about property, but for fixed income investments, together with cash held
in a foreign currency, tax is paid in NZ on the interest return, with a deduction for the tax
already paid overseas. Further to this, the value of those investments needs to be revalued each
year, if the value has increased this amount is added to your income and taxed, if it has decreased
your income is reduced accordingly. I am not an accountant, just repeating what my accountant tells me needs to be done and how it is handled in my accounts. There is in the accounts a line --
foreign exchanges losses/gains.

It sems to be an inaccurate measure simply using the end of year
balances, maybe needs to be watched if a large transaction occurs right at years end as balance is assumed to have been there all year.

Hi Old Rider. I think the accrual of capital gains method for fixed interest is only relevant in some investment vehicles - maybe companies and trusts? I seem to remember Estate Trusts get 5 years on "actual cashflow" before they have to go to accrual... most individuals taxed on cashflow gains only as I understand it.

[OldRider]

Hi Lizard,
You may well be right, the examples I mentioned in which it happens to me are trusts and a company.
I have no example for an individual.

[ENP]

With all these tax downsides is it then even worth owning overseas shares directly?

[RRR]

Tax doesn't influence my investment decisions. In the next 1-2 years my investments overseas will come under the purview of FDR and I am anxious of the work involved to detail all my investments, returns etc etc.

[PLYNCH]

"However, with my USD dividends that I will start receiving soon, the brokerage is slightly higher so I’m buying in lots of $15k or so to keep brokerage down below that 1% level."

You need to open an account with an US broker.

[Sauce]

With all these tax downsides is it then even worth owning overseas shares directly?

It's a good question. I purchased shares in the US this year, as I was confident the opportunity represented fantastic value. Factoring in the tax consideration it was much more marginal call but there was still a healthy margin of safety so I went for it.

Another consideration is that you can buy approximately 80% more in NZ dollar terms than you could say ten years ago - of course the US dollar is likely to get weaker and stay weak for quite some time - but with a much longer term horizon one can envisage the odds are reasonable of a stronger US economy and a stronger dollar relative to ours than now, which could potentially compound gains if it coincides with optimal exit timing. You definitely don't want to be hopefully of a speculative currency outcome to make the investment work, but I think at least considering where we are in the longer term cycle is important; in other words assess the currency risk. It might also help determine your expected time frame; I certainly wouldn't want to have cash over there with a short window right now.

You also get exposure a lot more companies to choose from that operate in an enormous market. It is my opinion that there is good value in the US right now (at an individual stock selection level). Eventually the bursting of the bond bubble may be a catalyst for gains as the huge outflow of funds from equities to bonds over the last decade reverses. Presumably it will take the economy to start firing again (and inflationary pressures) for that to happen - perhaps not IF but WHEN?

So in my opinion, as long as you factor the tax into your present value guesstimates and are very conservative, why not?

Regards,

Sauce

[Sauce]

One other thought. It also depends on the other opportunities in your universe. If there are assets available to you that are comparable on a risk/reward basis that don't carry the tax burden then it doesn't make sense to buy in the US.

The universe of 'rational' investments is not the same for everyone as it depends on what you think you can understand well enough to be confident in your valuation (prediction of the future). Most people, myself included, are prone to massive overconfidence in this regard; be wary of yourself. If most investors knew the true odds of them having an edge on the market they probably wouldn't bother trying.

This view may differ from those who believe diversification offshore is important but I definitely fall into the "be concentrated but understand each asset well enough to have an edge" camp, if you are going to stray from just buying index funds and enjoying market returns.

Regards,

Sauce

[Snoopy]

Hi Snoopy

The FIF is like a sheep in wolfs clothing relative to the US CGT. Here is a highly oversimplified way to look at it but the point should at least be clearer than my previous post: Would you rather pay 1.65% compounding over a lifetime or would you rather pay a one off 15% lump sum on your capital gain when you realise it?


Well, I don't consider it is worth moving to the US just to escape FIF 'take advantage' of the 15% capital gains tax rate over there!

I guess what I am about to say will be heresy to some, especially you Sauce, but given we all have to pay some tax, I quite like the NZ FIF regime, for the following reasons.

1/ It makes you concentrate on cashflows, and choosing investments with the underlying ability to 'pay for themselves' as they go along. This is an important criterion for successful investing.

2/ It smooths out the exchange rate fluctuations that are the bane of investing offshore.

3/ It demands a higher level of analysis before you commit yourself. You have to be really sure that the long term overseas market growth you seek really will still be there down the track. Otherwise, as you say Sauce, you are far better off investing closer to home in the NZX and ASX. I suspect the FIF regime has already saved many 'high flying NZ based investor's from putting their money in some overseas big name corporation that in reality they do not understand, even if they are too proud to admit it.

4/ It makes selling easier because you are not unduly influenced by your pushing of the sell button instantly generating a mega lump tax bill.

5/ It put a stop to the harsher tax regime that applied to high growth Asia (excluding Japan) that existed before FIF came along.

Of course I would personally be better off going back to the 'old days' and just paying tax on my overseas dividends, but last time I looked that wasn't an option.

Personally because of FIF I will be investing more money in NZ and Oz than I would have before the FIF regime arrived. But excising my own selfish position from the investment equation, from a national perspective, is this not a good thing?

SNOOPY

[Sauce]

Well, I don't consider it is worth moving to the US just to escape FIF 'take advantage' of the 15% capital gains tax rate over there!

Certainly not! ;) That's aproblem with text based discussion: I suspect my post came across with tone of great disdain. What I was trying to point out to ENP was to think carefully about the tax implications as the true economic impact (due to the cumulative effect of being assessed annually) is much greater than many people realise. It is an enormous disadvantage; professional money managers cannot beat the market on average because of the effect of their 1 - 2% annual fees. That provides some insight into what 1.65% annually can do to your overall long term returns.



Personally because of FIF I will be investing more money in NZ and Oz than I would have before the FIF regime arrived. But excising my own selfish position from the investment equation, from a national perspective, is this not a good thing?


Yes and that's by design of course. And you are right Snoopy.

But, largely just appealing to my own selfish interests, A true capital gains tax like the US system would have been a preferable compromise :)

I agree with all your other points.

Cheers

Sauce

[CJ]

Hi Old Rider. I think the accrual of capital gains method for fixed interest is only relevant in some investment vehicles - maybe companies and trusts? I seem to remember Estate Trusts get 5 years on "actual cashflow" before they have to go to accrual... most individuals taxed on cashflow gains only as I understand it.


Hi Lizard,
You may well be right, the examples I mentioned in which it happens to me are trusts and a company.
I have no example for an individual.

Cash basis persons can return fixed interest on a cash basis, not an accrual basis. Oversimplified test is you have to be a natural person with less than $100k in interest and $1m in financial arrangements.

[voltage]

You can use FDR to your advantage. You pay 5% tax on capital gain + income. The idea is that overseas shares pay very low dividends. So if you find stocks like vodafone etc that pay higher dividends over 5% you will pay less tax than if you paid tax on NZ and ASX shares in the top 200. There are a number of ASX shares that pay high dividends.
My problem with american shares etc is how to hold them. You usually need to use custodial services - $50 per stock per year.
Snoopy a good call on YUMS, a great performer better than MACD and has outperformed the DOW for a long time. A good 1 stock to own. My idea is to find 5 global stocks like this to complement ETFs

[CJ]

FIF Investments - If you are a "natural person‟ and your global share portfolio cost exceeds $50,000 at any stage during the year then the FIF rules apply to you. Just one clarification. The $50k threshold is based on original cost. So if you bought $40k of Apple shares a few years ago, they would not be subject to FDR even though they are worth a lot more than $50k now.

[voltage]

what a crazy tax system, my accountant finds it complicated. Is it likely to change?

[Sauce]

And US tax witheld in the USA can be offset against your FIF tax bill in New Zealand. Your impression that US dividends are somehow 'double taxed' is not right.
SNOOPY

I believe my impression is correct. If you read my post again you will see that I was referring to the fact that the profits are taxed at the company level in the US and then again at your personal tax rate in NZ.

Have the US got an imputation credit system that is mutually recognized in NZ?

Cheers

Sauce

[CJ]

what a crazy tax system, my accountant finds it complicated. Is it likely to change?Nope - here to stay. Even a suggestion that it could be used for the NZ CGT regime if it were to be brought in - Gareth Morgans wealth tax is similar to this as it encourages to put your money into something that will return more than the risk free return (currently deemed to be 5%).


I believe my impression is correct. If you read my post again you will see that I was referring to the fact that the profits are taxed at the company level in the US and then again at your personal tax rate in NZ.

Have the US got an imputation credit system that is mutually recognized in NZ?US does not have an imputation regime that is recognised here. You get a credit for any withhold tax witheld from the dividends but not for the underlying tax paid by the company is my understanding.

[Snoopy]

I believe my impression is correct. If you read my post again you will see that I was referring to the fact that the profits are taxed at the company level in the US and then again at your personal tax rate in NZ.


Apologies Sauce for misreading your point. You are right in that US profits are taxed at company level and again at shareholder level when paid out as a dividend. This is the way the USA does it to their own citizens. This is nothing to do with our own FIF regime though. It has always been this way in the USA (and indeed most overseas countries) as far as I know.

Nevertheless at shareholder level you do get credit for any withholding tax taken off you in the USA towards tax payable under the FIF regime in NZ.



Have the US got an imputation credit system that is mutually recognized in NZ?


I think the whole idea of imputation/franking credits is rather unique to Australia and NZ. The double taxation arrangement, recognizing each other's withholding tax is as far as it goes between the USA and NZ.

SNOOPY

[Sauce]

I think the whole idea of imputation/franking credits is rather unique to Australia and NZ. The double taxation arrangement, recognizing each other's withholding tax is as far as it goes between the USA and NZ.


Excuse the rhetorical question :)

Snoopy, you might be able to answer this (not rhetorical) question: If you own shares in a company on the ASX that was not on the exempt list when you bought it, and it is then added to the list, do you have to continue to pay FIF tax in future tax years or not?

It's not immediately clear from the IRD website. The bolded point below implies you would not be subject to FIF in future years if you own it on April 1 of the next tax year after it was added:

The list of exempt companies will be issued annually in May for the previous income year and will apply to taxpayers who have an income year ending 31 March (ie, most individuals).

Investors will be able to rely on the list, if they:



own shares in the company on 1 April in that income year, or

first acquire a share during the income year while the company is still on the All Ordinaries index, or
first acquire a share in a company that has been added to the list during the year on or after the add date, or
do not hold a share after the date that it no longer meets the residence or no-stapling criteria. (this date will be noted on the list)


But then this example they give confused me:

Example 3

Platinum Asset Management (PTM) was added to the index on 20 March 2008. If you acquired shares in PTM before that date you will not qualify for the FIF exemption. However, if you first acquired shares in PTM after 19 March 2008 you will qualify for the exemption.

In the PTM example presumably they mean ONLY in that tax year. The following tax year you will then qualify since you owned the shares on April 1.

Does this sound right?

Cheers

Sauce

[777]

I have always treated PTM as exempt and I bought them at issue. I realised my mistake after filing the 2008 return. From then on though I have assumed they do qualify. Have just done a calculation and have paid more tax under the exempt method than if I had included it with all my other FDR income due to two years where I did not have to pay anything.

[Lizard]

I am fairly certain that as soon as they are added to the index, they move from FIF Regime to exempt. Given the All Ords is usually only updated at 31 March, you wouldn't normally have a change during the year anyway.

The only thing is that if you have bought something under FIF during the year and then the go into the index the following year, I think you are supposed to then treat it as "sold" when it moves across - which arguably would mean it becomes a quick sale, even though you didn't sell it. I get some most years that move across the threshold and it is a little irritating to have to presume an extra 5% income on them if I have only just purchased... I'd be interested to know how Sharesight deals with it, as they are probably the most trustworthy way of getting the tax calcs done.

[Sauce]

Thanks Liz, 777
That confirms I am not going mad (or at least getting madder).
Cheers