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  1. #1
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    Default Should I actively avoid FIF investments?

    Hi all,

    Sorry if this is the wrong forum - perhaps this is better suited as a newbies corner question. Anyway, I'll ask here.

    I'm in the final stages of preparation for investing in the share market. I am happy to be boring and average, and therefore want to primarily focus on index funds / ETFs. I am keen to get diversification internationally. It seems to me I have (at least) three options:

    1) Invest in US stock market in Vanguard Total Market Index ETF (VTI) and similar international ETFs (e.g. VXUS). Expense ratio 0.05% / 0.14% and definitely falls under the FIF taxation rules.

    2) Invest in AU stock market in Vanguard Total Market Index ETF (VTS) and similar international ETFs (e.g. VGS). Expense ratio 0.05% / 0.18%, and presumably does not fall under the FIF taxation rules.

    3) Invest in NZX smartshares. Expense ratio is 0.75%, and certainly doesn't fall under FIF taxation rules.

    Given option 1) and 2) are both very low expense ratios, and assuming I am correct about option 2) not being a FIF-related investment, I would love to hear peoples thoughts on whether it is wiser to take option 1) with the possibly lower expense ratio (and fees obviously matter over the long term), or whether not dealing with FIF in option 2) is the better option.

    In other words, the thing tripping me up now is what is the lower cost option. I can appreciate and calculate the costs related to FIF taxes, but I'm not clear on the costs involved in something like option 2) or 3). Any details would be really appreciated.

    Some interesting links:

    1) Here is the list of Vanguard ETFs on offer in Australia (including VTS and VGS). Note that VTS is still based on US dollars - so I'm not sure if we can avoid FIF with this?
    https://www.vanguardinvestments.com....fs.jsp#etfstab

    2) The IRD advice on FIF Australian exemption:
    http://www.ird.govt.nz/toii/fif/how-...tax-exemption/

    4) The latest IR871 exemption list from March 2014 does not include these shares, but that may be because they weren't created until November 2014. How do we get guidance on such shares?
    http://www.ird.govt.nz/calculators/t...l?id=righttabs

    Thanks!
    Last edited by JonathanGiles; 14-01-2015 at 08:44 AM.

  2. #2
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    When I talked to IRD about FIF I was told IRD allow up to 50kNZD per person in FIF companies before the fif system comes in. If you are going over that in FIF companies then all investments come under the FIF system. I avoid getting into FIF as I just don't want the tax hassle. Obviously if you have far more than 50kNZD outside Aus then start learning accounting methods. There are plenty of contributors discussing this if you search FIF.

  3. #3
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    Correct - there is a $50k NZD exemption ($100k NZD if the account is a joint one with a partner, which it is in my case). I will certainly be going over this threshold, which is why I am looking into this so seriously now. In terms of tax and accountancy - I've recently switched accountants precisely for this reason - so that someone smarter than me can deal with all that hassle. However, it is still my obligation to understand my options.

    Thanks!

  4. #4
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    For what it is worth, I have emailed IRD to ask about whether the vanguard VGS and / or VTS ETFs are considered FIF exempt. However, regardless of this response, my bigger questions remains: what is the preferred option from a taxation perspective - to avoid FIF or not?

  5. #5
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    If you want to invest overseas and diversify I wouldn't have thought that you would have much choice but to invest in FIFs. Smarter people on this site may know of other alternatives.

    In regard to your initial query I think 2) is quite likely to be a FIF and 3) depending on which Smart Share Fund you invest in this could also be a FIF and I don't think they have an international fund just NZ and Aussie.

    I have hopefully attached the list of Aussie shares considered exempt from the FIF regime.

    If you can find a FIF that pays a greater than 5% dividend your onto a winner. The 5% is just an arbitrary figure as US and other foreign companies don't pay dividends but reinvest profits for capital growth as I don't think they have an imputation regime like NZ & Aussie(so profits are taxed as second time as dividends.). Most other countries have a capital gains tax to tax this growth. NZ doesn't have a capital gains tax but have the FIF regime and the Fair Dividend Rate (FDR) instead.
    I personally don't like managed funds but if Warren Buffett suggests the low cost Vanguard index funds it would be very tempting. I am expecting the GFC2 this year so personally will continue to wait for the indexes to drop before investing. Mind you I could be waiting another ten years for the GFC2 so don't listen to me.
    Last edited by Aaron; 14-01-2015 at 09:45 AM.

  6. #6
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    Aaron - thanks. I guess my confusion is around where the FIF applies - is it on the ETF itself, or the stocks that the ETF owns? Clearly if it is the later, it is FIF, but I was wondering if it is the former....?

  7. #7
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    Regarding > 5% dividend - I spoke about this to a friend who is an investment advisor. He stated that getting enough in dividends to cover the FIF taxes essentially never happens - almost always the FIF taxes are paid out of the pocket of the owner of the shares, rather than via the dividends produced. In the end this is why FIF was created - to adequately tax overseas shares that prefer to retain dividends and instead grow the share price. This is one of the things that worries me about FIF - paying tax on unrealised capital gains (when it could all be blown away by GFC2 after 20 years of paying the taxes!).

  8. #8
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    Dear Jonathon
    Not sure what you mean. I am guessing you are asking if a NZ based fund investing in overseas assets is considered a FIF. Below is the definition from the IR461 Guide to FIF rules. You can access this from the IRD website. just search IR461. I guess a NZ based fund that pays the tax on your behalf like a PIE fund would mean you don't personally have to calculate the FDR or CV but they would do it for you and you would give them your Personal Investor Rate PIR.

    "What is a FIF?
    A FIF is
    • a foreign company
    • a foreign unit trust
    • a foreign superannuation scheme (prior to 1 April 2014)
    • a FIF superannuation interest (from 1 April 2014)
    • an insurer under a life insurance policy (and the policy is not offered or entered into in New Zealand).
    Note: There are potentially different rules for holdings of 10% or more.
    A FIF does not include term deposits, bonds, debentures, money lent, foreign employment, pension"

    My Kiwisaver fund invests internationally but I guess this is like a PIE fund.
    It is pretty confusing so maybe ring some of the investment companies like Smart Shares and see if they can clarify it for you or read the IRD booklet. Sorry I can't be of more help it would depend on the fund you are looking to invest in and how it is structured and where it is based.

  9. #9
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    As an investor in Platinum Funds I have been treated better under the FIF system than I was before. This is because their distribution is reasonably high.

  10. #10
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    Quote Originally Posted by JonathanGiles View Post
    Regarding > 5% dividend - I spoke about this to a friend who is an investment advisor. He stated that getting enough in dividends to cover the FIF taxes essentially never happens - almost always the FIF taxes are paid out of the pocket of the owner of the shares, rather than via the dividends produced. In the end this is why FIF was created - to adequately tax overseas shares that prefer to retain dividends and instead grow the share price. This is one of the things that worries me about FIF - paying tax on unrealised capital gains (when it could all be blown away by GFC2 after 20 years of paying the taxes!).
    I didn't say I knew any FIFs that paid a dividend greater than 5% but if you know of one tell me. If your friend is an investment advisor you would be better asking him/her about this as I am not an investment advisor and as an amateur any advice I give should be carefully double checked and totally relying on it would be crazy.
    Ask your friend when the GFC2 is going to arrive I am getting sick of waiting.

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