Understanding FIF taxes vs Smartshares fees

[JonathanGiles]

Hi all,

I've been trying to understand what the best option for me and my family is now that we are getting to a point where we are mortgage free and able to start investing to grow our savings.

In my mind, the best options seem to be either investing in US ETFs (e.g. the Vanguard VTI index) via my E*Trade account, or investing locally in a smartshares ETF. The primary difference is the fees (0.05% vs 0.75%) and the added complication of FIF for the US ETFs.

I'm by no means an accountant (or even overly knowledgeable about taxes), but I've been trying to mock up a spreadsheet that compares both approaches (which I am happy to share if people are interested or want to give feedback - it's pretty primitive though).

The one thing I do not fully understand (and it is embarrassing to admit) is that I don't know how to take my calculated FIF income value (with FDR or CV) and calculate the amount of tax I would need to pay to the taxman. Is it simply taking 33% (given my income pushes me into the highest income bracket) of the FIF income, or am I misunderstanding?

In my mocked up data I can see I would have a FIF income of $6,250 (FDR) or $10,000 (CV) with a starting investment of $125,000 and an 8% gain over the year. Given this, am I correct to assume tax payable is approximately $2,000 or $3,300?

In my spreadsheet, it seems to me that the 0.75% fee of smartshares is less than the tax I would owe under FIF. What I don't account for is any taxes on my smartshares - I'm simply taking the 0.75% fee off annually. Should I take 33% off of the earnings each year to more fairly calculate smartshares (my intention would be to have dividends reinvested into smartshares, so there would be no cash gains)?

Would it be fair to say peoples uneasiness with FIF is that you're paying out the tax when the gains are only on paper, versus smartshares where you're paying a higher fee but then only taxes on realised gains?

Overall, any insights and thoughts would be much appreciated!
Thanks!

[zb3]

Hi all,

I've been trying to understand what the best option for me and my family is now that we are getting to a point where we are mortgage free and able to start investing to grow our savings.

In my mind, the best options seem to be either investing in US ETFs (e.g. the Vanguard VTI index) via my E*Trade account, or investing locally in a smartshares ETF. The primary difference is the fees (0.05% vs 0.75%) and the added complication of FIF for the US ETFs.

I'm by no means an accountant (or even overly knowledgeable about taxes), but I've been trying to mock up a spreadsheet that compares both approaches (which I am happy to share if people are interested or want to give feedback - it's pretty primitive though).

The one thing I do not fully understand (and it is embarrassing to admit) is that I don't know how to take my calculated FIF income value (with FDR or CV) and calculate the amount of tax I would need to pay to the taxman. Is it simply taking 33% (given my income pushes me into the highest income bracket) of the FIF income, or am I misunderstanding?

In my mocked up data I can see I would have a FIF income of $6,250 (FDR) or $10,000 (CV) with a starting investment of $125,000 and an 8% gain over the year. Given this, am I correct to assume tax payable is approximately $2,000 or $3,300?

In my spreadsheet, it seems to me that the 0.75% fee of smartshares is less than the tax I would owe under FIF. What I don't account for is any taxes on my smartshares - I'm simply taking the 0.75% fee off annually. Should I take 33% off of the earnings each year to more fairly calculate smartshares (my intention would be to have dividends reinvested into smartshares, so there would be no cash gains)?

Would it be fair to say peoples uneasiness with FIF is that you're paying out the tax when the gains are only on paper, versus smartshares where you're paying a higher fee but then only taxes on realised gains?

Overall, any insights and thoughts would be much appreciated!
Thanks!

Overseas investments under 50k aren't taxed on capital gains, so put 50k in your personal name, and the remainder in a company. A company's marginal tax rate is only 28% so you will benefit there also.

In regards to the FIF regime, you are taxed on 5% of the opening value of your investments each year. Ie if on the 1/04/2013 my investments were 100k, I'd have assessable income of 5k, taxed at my marginal rate (if 33% then 1650 tax). In order to get around some FIF tax you can purchase a x2 leveraged ETF like SSO, and rebalance it once a year. This will mitigate most of the volatility decay and track x2 SPY reasonably closely and in the long run will save you taxes. Ie instead of buying 200k SPY you just buy 100k SSO and rebalance yearly to the value of what SPY would have been. Rebalancing yearly avoids the quick sales tax - as in order to incur that you must buy and sell within a year.

As the FIF regime caps tax at 5% a year, buying SSO allows you to make close to double or more than double the index (depends if the market is trending or volatile). SSO is a leveraged ETF that replicates x2 daily exposure to the index. In a trending market (i.e. straight up or straight down, you will perform better than the index). For example in 2013, SPY achieved returns of 32.5% versus SSO's 70.5%. But where the market is volatile, e.g. 2011, you will under perform. Yearly rebalancing does result in some volatility decay over time, but the amount you save on taxes outweighs this.

[Harvey Specter]

In my mind, the best options seem to be either investing in US ETFs (e.g. the Vanguard VTI index) via my E*Trade account, or investing locally in a smartshares ETF. The primary difference is the fees (0.05% vs 0.75%) and the added complication of FIF for the US ETFs.

The primary different is Smartshares invest in NZ and/or Australia whereas the US EFT invest in [which ever EFT you invest in - global/US/ emerging markets/gold/oil/corn/???]. Hopefully they will release more smartshares soon but the fees are still high for an index fund.

I have never investigated but you may be able to get a managed fund which offers similar to the Vanguard funds. I think my Kiwisaver (superlife) offers non kiwisaver global index funds.

I dont know for sure but Smartshares are probably a PIE so would pay tax on income at 28% which is a final tax (if you have a lower PIE rate, then at the lower rate which could be good if you are coming upto (early?) retirement).