What are your Investment Rules?

[SBQ]

"Let your winners run: “In August 1994 … Berkshire completed its seven-year purchase of 400 million shares of Coca-Cola we now own. The total cost was $1.3 billion – then a very meaningful sum at Berkshire. The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Growth occurred every year, just as certain as birthdays."
https://www.livewiremarkets.com/wire...-annual-letter

The benefits that Berkshire received by owning dividend paying stock can not be compared to how NZ investment funds operate. The key difference is due to taxation. Buffet is firm to keep all the dividends within Berkshire because when it's paid out to shareholders, the shareholders *usually* end up with a tax bill to pay. In America, long term capital gains is significantly lower than tax paid on dividends received. In NZ, long term capital gains tax is 100% tax free yet, we have an emphasis for receiving dividends (which is not at all 100% fully imputed tax credited). This simple logic is often never discussed by NZ financial advisers to their clients.

Nor where they will explain that the individual who invests directly in overseas shares like Coca Cola can be exempt of tax (under the deminus $50K threshold) while the first dollar paid into a Kiwi Saver fund (that buys the same KO stock) ; would be subjected to FIF.

Berkshire Hathaway does not cream a 1%+ admin/management fee, every year, on the assets they manage. Buffet for many decades earns a measling $100,000 income from Berkshire and when questioned why so low, his response was "I've never needed anymore than that to spend each year...". Anyways there are a lot of differences on how Berkshire Hathaway operates vs your Kiwi Saver fund.

[Snoopy]

The benefits that Berkshire received by owning dividend paying stock can not be compared to how NZ investment funds operate. The key difference is due to taxation. Buffet is firm to keep all the dividends within Berkshire because when it's paid out to shareholders, the shareholders *usually* end up with a tax bill to pay. In America, long term capital gains is significantly lower than tax paid on dividends received. In NZ, long term capital gains tax is 100% tax free yet, we have an emphasis for receiving dividends (which is not at all 100% fully imputed tax credited). This simple logic is often never discussed by NZ financial advisers to their clients.

I take issue with one detail of the above explanation. The purpose of the imputation credit system is to ensure that New Zealand income tax is only paid once on company earnings, and not twice when dividends from those earnings end up in shareholders hands. If dividends are not fully tax credited, that is because the said company has not paid NZ tax on a portion, or all, of those earnings. Examples of this are when an NZ company pays some of its tax overseas to an overseas tax authority. Or when a company pays dividends from profits as a result of capital gain (like property revaluations) which are not taxable in NZ at the company level. Thus a dividend that has not been fully imputed means that full NZ income tax has not been paid on those earnings. Any NZ company that has paid full NZ tax on their earnings will pay a fully imputed dividend.

Nor where they will explain that the individual who invests directly in overseas shares like Coca Cola can be exempt of tax (under the deminus $50K threshold) while the first dollar paid into a Kiwi Saver fund (that buys the same KO stock) ; would be subjected to FIF.

Just because a taxpayer investing overseas is exempt from the FIF regime on their individually owned shares, does not mean they are exempt from tax. They still must pay tax on any dividends received.

SNOOPY

[Bjauck]

I take issue with one detail of the above explanation. The purpose of the imputation credit system is to ensure that New Zealand income tax is only paid once on company earnings, and not twice when dividends from those earnings end up in shareholders hands. If dividends are not fully tax credited, that is because the said company has not paid NZ tax on a portion, or all, of those earnings. Examples of this are when an NZ company pays some of its tax overseas to an overseas tax authority. Or when a company pays dividends from profits as a result of capital gain (like property revaluations) which are not taxable in NZ at the company level. Thus a dividend that has not been fully imputed means that full NZ income tax has not been paid on those earnings. Any NZ company that has paid full NZ tax on their earnings will pay a fully imputed dividend.



Just because a taxpayer investing overseas is exempt from the FIF regime on their individually owned shares, does not mean they are exempt from tax. They still must pay tax on any dividends received.

SNOOPY

In addition, The company tax rate is 28%, so even fully imputed dividends paid to NZ Resident individuals have further RWT levied to take the imputation plus RWT to the 33% individual rate. Of course an individual must pay additional tax if their marginal income tax rate is 39%..

I guess, as I understand it, with individuals in KiwiSaver, under fif rules their KiwiSaver fund’s foreign fif investments are deemed to earn 5% taxable income in a year even if no dividend is paid, and the foreign investment valuation drops. However the top tax rate for an individual with a KiwiSaver account (a PIE) is 28%.

DYOR this is not advice.

[SBQ]

Regarding fully imputed - don't bet your shoe that most of the companies listed in the NZX are under a fully imputed tax regime. The booklet that covers the process requires lawyers and a team of accountants to understand. But regardless, when an individual embarks on a 'long term' retirement investment plan, the should NOT focus on collecting dividends because it's very clear the individual can no reinvest better for better returns. The primary goal for any dividend payment is for residual income where the plan is not for long term gains. But you've side stepped my issue i'm hitting at. Why not take the tax free capital gain by retaining the profits on the shareholder's equity section of the balance sheet (by selling a portion of shares when the shareholder wants an income) ? For myself there's no worse case to have random dividends paid when I see no interest in wanting that income; all that does is erodes long term compound gains. Nevertheless in NZ, regardless of the type of business (growth / mature ) stocks, dividends have been hammered down to investors in all sorts of ways without logic.

Just because a taxpayer investing overseas is exempt from the FIF regime on their individually owned shares, does not mean they are exempt from tax. They still must pay tax on any dividends received.

SNOOPY

Again stop with the side stepping argument. The whole reason FIF was introduce in NZ was to address that in America, most companies focus on improving "shareholder wealth" and to do that, that means none other than higher share prices for capital gains. This was spelled out plain and clear when Bill English (excuse me if that was the wrong person?) office had explained the introduction of FIF back in 2005 (or thereabouts). So let me clarify this whole FIF issue. Many of NZ Kiwi Saver funds buy nothing but the Vanguard S&P500 ETF (or mimic it's approximation) which you should know, these ETFs pay NO dividends whatsoever. So it's very clear the individual that buys VOO directly is at a clear tax advantage.

and if you have read my posts that has hammered this issue countless of times, the biggest killer to compound future gains is the robbing of high management fees. If you think 2 or 3% fees applied on the total portfolio every year is robbery, considered how FIF impacts it when the FDR is at 5%. There is no way in *ell a person under this Kiwi Saver scheme will have nearly the same amount of wealth as the same person living in N. America under their investment tax scheme.

[Snoopy]

Regarding fully imputed - don't bet your shoe that most of the companies listed in the NZX are under a fully imputed tax regime. The booklet that covers the process requires lawyers and a team of accountants to understand.

You are over-complicating things. If a company operates in New Zealand and pays full corporate tax on their New Zealand profits then they are in a position to pay fully imputed dividends from those profits. It is that simple.

But regardless, when an individual embarks on a 'long term' retirement investment plan, the should NOT focus on collecting dividends because it's very clear the individual can not reinvest better for better returns.

No I respectfully disagree on this point. It might be true in the USA or in Canada, with the world's largest market, the USA on their doorstep. But there has been some terrible capital destruction by NZ listed companies, taking their NZ generated capital and NZ centric view on how to run a business to the world and coming a cropper. The problem is the NZ market is small, and most listed companies reach a stage where further expansion in NZ does not make sense. As a shareholder in a company like that, I would far rather they pay me their profits as a dividend rather than reinvest those profits in a new tangential business venture that management does not fully understand. This is very different to the USA where you can start small in one state, and then if successful, have 49 similarly regulated states which you can grow your proven business model into.

Why not take the tax free capital gain by retaining the profits on the shareholder's equity section of the balance sheet (by selling a portion of shares when the shareholder wants an income) ?

Because you are assuming that profits retained by management can be reinvested back into the business to gain incrementally higher earnings than would be the case if they paid that money out to you as a dividend. If that were always true I would agree with your strategy 100%. But for many NZ companies it is not true. In fact I would go so far as to say for most NZ listed companies it is not true.

Again stop with the side stepping argument. The whole reason FIF was introduce in NZ was to address that in America, most companies focus on improving "shareholder wealth" and to do that, that means none other than higher share prices for capital gains.

Many of NZ Kiwi Saver funds buy nothing but the Vanguard S&P500 ETF (or mimic it's approximation) which you should know, these ETFs pay NO dividends whatsoever. So it's very clear the individual that buys VOO directly is at a clear tax advantage.

Now I know that the typical US company pays a lower dividend rate than a typical NZ company. That is to do with the better growth prospects that USA companies have, and also the double taxation of any dividends that are paid into US shareholders hands.

But are you seriously claiming that of all of those companies in the Vanguard S&P500 fund, none of them are paying dividends to Vanguard? Of course they are, and here is another revelation for you. Of those dividends that Vanguard is receiving, Vanguard is paying tax on them! As an individual Vanguard S&P500 fund ETF holder, all this takes place under the 'Vanguard cloak' so you don't see it happening. Vanguard simply takes the net dividend money and reinvests in their own fund. Nevertheless as a Vanguard S&P500 fund ETF unit holder, you are paying tax on these 'hidden dividends to Vanguard' all the way through.

The fact that the Vanguard S&P500 fund is not paying a dividend directly to you as a unit holder, does not mean you are getting a tax free ride.

and if you have read my posts that has hammered this issue countless of times, the biggest killer to compound future gains is the robbing of high management fees. If you think 2 or 3% fees applied on the total portfolio every year is robbery, considered how FIF impacts it when the FDR is at 5%.

The 'fair dividend rate' is your taxable income. So if your incremental tax rate is 33%, the tax on your FDR balance is: 0.33 x 5% = 1.65%. Not 5% as some think.

SNOOPY

[Bjauck]

…

The 'fair dividend rate' is your taxable income. So if your incremental tax rate is 33%, the tax on your FDR balance is: 0.33 x 5% = 1.65%. Not 5% as some think.

SNOOPY

It is sad reflection on the investment environment that some think that NZ would be so discriminatory to tax unrealised capital gains on overseas equities and other overseas investments so punishingly as to impute them as producing 15% annual income… It is bad enough if your KiwiSaver has to account for 5% FDR income in years when asset valuations are falling and minimal actual income is received.

[SBQ]

It is sad reflection on the investment environment that some think that NZ would be so discriminatory to tax unrealised capital gains on overseas equities and other overseas investments so punishingly as to impute them as producing 15% annual income… It is bad enough if your KiwiSaver has to account for 5% FDR income in years when asset valuations are falling and minimal actual income is received.

I'm glad you've understood the basic premise of my point, while Snoopy has been great at addressing everything else but the real issue.

Snoopy: But are you seriously claiming that of all of those companies in the Vanguard S&P500 fund, none of them are paying dividends to Vanguard? Of course they are, and here is another revelation for you. Of those dividends that Vanguard is receiving, Vanguard is paying tax on them!

The short answer is yes. I am claiming over in N. America, the taxing of investments by individuals ultimately comes at time of cash withdrawal of their fund. So if the person invests in a 'tax deferred' 401k plan, ALL of the dividends that that ETF receives every year is tax free for as long as it stays withing their 401k plan. It's only at retirement (or pay a penalty for early withdrawal) that when the funds are withdrawn (by sale of their share holding), that tax comes into play. The 'typical' ETF funds themselves, if they are passively managed, have little to do with tracking the amount of tax they have to pay for each individual client they have as their goal is simplified to achieving long term returns for their clients. Again, the taxation aspect ultimately lies at the client end so when an ETF has dividends each year - some clients end up paying taxes on those dividends if the type of investment account is a non-registered account. However the point in discussion is comparing to NZ's Kiwi Saver so in places like the US (401K/tax-free IRA) or Canada (RRSP/TFSA/RDSP/RESP), it's very clear clients that invest for retirement (or for a specific purpose / category) have a much higher asset value than the Kiwi Saver that buys the same ETF funds.

Again, the whole intent why FIF was introduced in NZ was to address the issue that over in N. America, returns from share investments come more in the form of capital gains while in NZ, it comes more in the form of dividends. By imposing FIF, they chose some 'arbitrate' FDR rate of 5% ; I question why 5% was chosen to be the "Fair Dividend" rate? Why not 2% or 10% and furthermore why no re-capture limit for years where portfolios go negative? You can be sure that the 2022 year most of the funds were negative so no FDR but, what about this 2023 year if it does 20% return? Will all those clients have pay FIF again? The lessen this burden, no FIF should paid unless it exceeds the net asset value of the prior positive year. So if the fund posted a 20% loss in 2022 - say from $10B down to $8B, no FIF tax to be paid until it exceeds $10B in the following years. But as far as my numerous look up in IRD's FIF handbook, there is no such allowance.

@Bjauck: The NZ way of taxation is so screwed up that it's no wonder all the people around me here have gone rich by investing in real estate. How can they lose by holding rental properties after 10 years where the capital gains are 100% tax free. To add more insult, why does FIF only apply to foreign share investment holdings but not on foreign real estate properties?

NZ has so much to do to level the playing field. When I see long standing investment schemes in Canada; the RESP, RDSP, & TFSA, all with the main focus at giving the needy or financially disadvantaged a better hand than the ultra rich, does not exist in NZ. This year my friend in Canada has entirely funded his daughters uni education from his RESP (Registered Education Savings Plan) that was brought out over 20 years ago in Canada. The gov't matches contributions with the family from as early as when the child was born and ALL OF THOSE YEARS up to when the child gets to post secondary education, the withdrawals from RESP are 100% tax free (and the compound gains year after year are untaxed).

Then there's the RDSP for those who have disabilities. Like the RESP, they get life long tax free compounding of their investments. The disbursements at any time is tax free (either to fund for accommodation, education, or anything that can lead the disabled person into society).

When I look at NZ, it seems all the cards are stacked in favour to the rich that own all the assets. Those on the disability benefit have no plan to improve their outcome (at least not financially). Gov't hand outs are not the solution of bridging inequality across society.

[SBQ]

I should clarify one important difference between NZ's Kiwi Saver vs the RRSP or 401K we see in N. America. The latter focuses on taxation only upon withdrawal. The former focuses on taxing on gains every year via FIF (again, providing we're investing in the same asset class say the Vanguard VOO). IRD wants the tax $ now and throughout the plan, but at the end, the person can withdraw ALL of the invested funds tax free. But how is this advantageous? I can't see how a pensioner at age 65 would want to make such a withdrawal from their long term Kiwi Saver plan as it's of no use (unless it's of a small value). I'm not sure what the premise would be for Kiwi Saver but with the 401K and RRSPs, you "ONLY PAY TAXES" based on the amount you WANT to withdraw. So the retired person can factor what tax bracket they are in that year... if they choose fit to be in the top tax bracket, they can withdraw a lot for a new motorhome or luxury sport's car purchase. If they already have income from other sources, they may NOT choose to make any withdrawal from their 401K/RRSP plan in that year. It's all about putting the ball in the investor's court so they can tailor what tax amount of tax they pay. Of course ultimately when the person dies, then 'deemed disposition' applies so all the taxes will be paid by the estate.

[Snoopy]

I should clarify one important difference between NZ's Kiwi Saver vs the RRSP or 401K we see in N. America. The latter focuses on taxation only upon withdrawal. The former focuses on taxing on gains every year via FIF (again, providing we're investing in the same asset class say the Vanguard VOO).

Yes I do understand your point that NZ Kiwisaver is 'pay tax as you go' but the equivalent North American Plan is pay tax 'when you choose to receive whatever portion you want of your pension scheme accumulated capital back', after retirement age. But I still believe your assertion that the North American investor doesn't pay tax through the 'accumulation phase' of their retirement fund is wrong.

The structural issue that I am trying to point out is that:

1/ US corporations pay income tax on their profits.
2/ But those same profits are taxed again when a portion of those profits are paid out to investors as dividends,

By not claiming any pension money during the accumulation phase, North American retirement fund holders can postpone the tax 2/. But they cannot avoid paying tax 1/, because that is paid to the IRS before the retirement fund gets it. So it isn't true to say that North American retirees pay 'no tax' until they cash out of their fund.

SNOOPY

[Bjauck]

…
When I look at NZ, it seems all the cards are stacked in favour to the rich that own all the assets. Those on the disability benefit have no plan to improve their outcome (at least not financially). Gov't hand outs are not the solution of bridging inequality across society.

Well I guess Labour’s Cullen could get away with the fulsome taxation of KiwiSaver and the extension of FIF taxation which ensured the fulsome taxation of FIFs in KiwiSaver PIEs, because there are few votes to be lost over it. Unlike the likely electoral damage which would be wrought from introducing a similar scheme with investor real estate, in which more kiwis are more heavily invested.

There also seems to be little appetite with Labour or National to introduce major change to our highly regressive tax system to break any poverty trap.