Investing for the long term - a wise choice right now?

[Snoopy]

How does Smartshares or others like Sharesies get around IRD's FIF rule where if your portfolio exceeds $50K if (foreign stock holdings), then FIF kicks in.

SBQ, the FIF tax is levied (or not) based on your purchase price being more than $50k. So if you buy $50k worth of shares hold them for 30 years and sell for $500k you will pay no FIF tax. You will have to pay NZ income tax on the dividends you receive along on the way though.

Does Smartshares automatically deduct the maximum 5% FIF tax with-holding in a year if the portfolio gains exceed that? Or by 'comparative analysis method' take ie 3% if your paper gains was only 3% ? Because for any long term retirement planning $50K is not a lot of $ and when you invest for the long term, in 20 or 50 years time, inflation would of gone up and that $50K portfolio would buy a lot less.

There is no such thing as 'maximum 5% FIF tax'. You are taxed on 5% of your cumulative FIF holding opening balance at your marginal tax rate. That generally works out to be about 1.5% of the opening balance, offset by dividends that are untaxed separately in NZ. Whether Smartshares deduct FIF tax at the start of the financial year I am not sure. But if they do, then all they are doing is paying tax on your behalf. The problem with Smartshares paying FIF tax for you is that is that they may not know the extent of your full FIF portfolio. So they won't know what your FIF tax liability is, because FIF tax is calculated on a 'whole of FIF portfolio' basis.

When you hold foreign shares with an NZ third party provider, you will get to nominate how you wish them to treat you for tax. That won't make any difference to your tax bill in the end. But it might make some difference to the withholding tax deducted along the way.

SNOOPY

[Tronald Dump]

SBQ, the FIF tax is levied (or not) based on your purchase price being more than $50k. So if you buy $50k worth of shares hold them for 30 years and sell for $500k you will pay no FIF tax. You will have to pay NZ income tax on the dividends you receive along on the way though.



There is no such thing as 'maximum 5% FIF tax'. You are taxed on 5% of your cumulative FIF holding opening balance at your marginal tax rate. That generally works out to be about 1.5% of the opening balance, offset by dividends that are untaxed separately in NZ. Whether Smartshares deduct FIF tax at the start of the financial year I am not sure. But if they do, then all they are doing is paying tax on your behalf. The problem with Smartshares paying FIF tax for you is that is that they may not know the extent of your full FIF portfolio. So they won't know what your FIF tax liability is, because FIF tax is calculated on a 'whole of FIF portfolio' basis.

When you hold foreign shares with an NZ third party provider, you will get to nominate how you wish them to treat you for tax. That won't make any difference to your tax bill in the end. But it might make some difference to the withholding tax deducted along the way.

SNOOPY

Thanks Snoopy, much better explanation than mine! You also make another key point - Smartshares calculates and pays all my tax so I don't have to worry about including dividends my on tax returns.

[ratkin]

FIF is a pain in the arse, I mean what is even the point of it. As for the 50k limit, that is ridiculously low. Hardly worth the trouble of investing overseas for less than 50k, so basically cannot avoid it

[SBQ]

SBQ, the FIF tax is levied (or not) based on your purchase price being more than $50k. So if you buy $50k worth of shares hold them for 30 years and sell for $500k you will pay no FIF tax. You will have to pay NZ income tax on the dividends you receive along on the way though.

Page 15 of IRD's FIF document states once you hit $50K of total portfolio value, then FIF applies:
https://www.classic.ird.govt.nz/reso...2f11/ir461.pdf

It has nothing to do with the purchase price or how many times you've traded in the year. All IRD cares is if you breach that threshold, then you have to work out FIF and if you trade the same stock multiple times, then you have a much more complicated 'quick sale' calculation to do.

You do realise the FIF applies annually on the PAPER GAINS on the portfolio and applies on the TOTAL value (no exemption on the first $50K)? This is important because if say you're at retirement age and have say a $2M portfolio - you would be stuck with total taxable income of $100K. How many seniors have other sources of income to support paying this tax liability - assuming say 40% so $40K of income? The most likely scenario is the senior would be forced to sell some of their shares in the portfolio to meet the tax obligation. If there's no worse way of devaluing the performance of your portfolio, then I don't know what else is because famed John Bogel (the father of ETF) has always said and i'm paraphrasing, "there's no better way to reduce or devalue the performance of your portfolio than paying high management fees... that many hedge or managed funds claimed to do better for their investors" IMO, I view the FIF taxing no different to such high management fees and has the very same effect.

There is no such thing as 'maximum 5% FIF tax'. You are taxed on 5% of your cumulative FIF holding opening balance at your marginal tax rate. That generally works out to be about 1.5% of the opening balance, offset by dividends that are untaxed separately in NZ. Whether Smartshares deduct FIF tax at the start of the financial year I am not sure. But if they do, then all they are doing is paying tax on your behalf. The problem with Smartshares paying FIF tax for you is that is that they may not know the extent of your full FIF portfolio. So they won't know what your FIF tax liability is, because FIF tax is calculated on a 'whole of FIF portfolio' basis.

When you hold foreign shares with an NZ third party provider, you will get to nominate how you wish them to treat you for tax. That won't make any difference to your tax bill in the end. But it might make some difference to the withholding tax deducted along the way.

SNOOPY

If you use the 'Fair Dividend Rate' that amount is 5%. I'm well aware of the taxing of FIF. However, any person receiving dividends abroad say from US equities are stuck with IRS tax with-holding - 33% as marked on the W8BEN form account holders have to file every 3 years. The dividends are deposited into the same portfolio account and then IRD slaps on FIF which in effect, is a double taxation on the dividend because the calculation works on the whole total of the account. There's no consideration for broker fee deductions / credits with FDR. But the worse thing about this FIF is on years where you go negative, you get NO CREDIT BACK. So on the future years when you rebound back, you're taxed on the paper gains when you try to go back to your previous 'high' account value.

Fundamentally, the FIF is a huge minus to the NZ investor (in Kiwi Saver or invested directly). Way back when Michael Cullen was pushing it through Parliament, the reason was clear to address the differences between NZ investing vs overseas N. American investing because their approaches are different. That is NZ share investors focus on dividend returns vs N. American investors focus on capital gain growth (on most part tax free capital gains). So as i've read back during the FIF introduction, "A savy investor in NZ could get away paying no tax on their US equities on capital gains". Yet at the same token, NZ investors in the Auckland housing market got away with paying any taxes on their capital gains. I was critical to Mr Cullen's office saying "You guys are pushing a double standard in NZ".

How exactly does Smartshares deduct the FIF tax? If the account is fully invested in US equities and has no cash balance on hand to pay the tax liability? and you hit it right about investors can have multiple accounts and Smartshares being 1 account would have no idea of the person's total tax liability.

[SBQ]

FIF is a pain in the arse, I mean what is even the point of it. As for the 50k limit, that is ridiculously low. Hardly worth the trouble of investing overseas for less than 50k, so basically cannot avoid it

This is exactly my point. $50K is a joke and the process involved to comply is a headache. I've been vocal against FIF because it's an unfair tax approach just to address the capital gains of shares abroad. Very unfair to only look at the tax on the gains but not on the on years with losses. In a business you can claim a loss in a business year towards gains future years.

I also find it very difficult to assess the performance of NZ funds that have FIF exposure. Are their returns greater than buying NZ local shares of similar business after tax?

On the issue of taxation - i'm firmly not against paying it (the gains have to be paid somewhere). But what i'm against is an unforseen tax liability (ie say when the company randomly issues a dividend of varying %), or directly taxing the value of the portfolio where the investor has no cash flow (especially important to those in retirement age). I find this very foreign to me because back in Canada, investors structure their retirement portfolio so they contribute the most towards their fund or ETF where it grows tax free (and I may be being repetitive here...) and then upon retirement age, the senior CAN CHOOSE how much they want to sell in their portfolio and elect how much tax THEY WOULD LIKE to pay (ie for that fancy boat, car, or vacation).

Again, sorry for being repetitive but surely, there must be a better way for NZ investors to get into shares without being walked on by FIF or ring fenced with picking only NZ shares (which comes with a much higher risk).

[mfd]

I'm not an expert and don't pay FiF, but page 15 talks about the 'amount' of your foreign investments being under 50k. 'Amount' is defined in the glossary as the cost - even going so far as if you inherit foreign shares, the 'amount' of them is the initial cost the deceased person paid. You do not appear to have to continually value your holdings if you leave them alone.

I'm sure we'd all agree an investment will do worse if it is taxed. For better or worse, NZ has fewer tax benefits for investors than countries like the US and the UK (although imputation credits are rare internationally and very valuable). As most of these benefits would accrue to those who are doing quite nicely, I don't have a problem with this approach. If you're in a position to save and invest significant amounts of money you are big enough to stand on your own two feet and not expect too much of a government handout.

[SBQ]

@mfd:

Page 15 spells it very clear. Once you breach the $50K value at anytime in the year, you have to do FIF. Look to the further examples in that IRD doc. Those that look for tax fairness on portfolio gains won't find it in NZ. Just like major corporations don't look to NZ to setup as headquarters because of the 28% corporate tax rate is uncompetitive to US or Canada corporate rates. The FIF is a poor approach just because NZ has no capital gains tax and the National Party at the time wanted to address this anomaly while not caring about the massive capital gains made from the NZ real estate markets decade after decade.

I make no mention about gov't hand outs (those are only for the needy and those with disabilities etc.). I'm talking those with huge sums of $ (in another post I made many months ago talking to Chch financial advisers my situation where if I inherited a significant size portfolio based on US equities from abroad - how could I get the same performance as before by being a NZ resident?). None of those financial advisers could tell me straight or show me an investment profile that would better than what my parents have done abroad. I also asked why NZ real estate comes with no capital gains tax and would I be better off buying houses than buying shares? Again, they come back with the same excuse that you would be exposed to only 1 asset class and would be exposed to too much risk story. But the reality is those that bought Auckland houses 20+ years ago would be sitting on gains far higher than returns on the NZ shares net of taxes. ie. if Auckland house prices avg 7% / year for the past 10 years ; you would need like 10 or 12% of dividend returns, then less the tax, to get the same return.

Don't forget the example at senior retirement. Typically have no cash flow income but having a large portfolio under FIF would force them to sell shares just to pay the tax liability.

[Snow Leopard]

Hi all,

I have $10k to invest for my son (looking at 10 years) and was thinking about what options would be best right now. I am not trading expert so was thinking maybe putting the money into a fund, or alternatively to buy into AIA as I a pretty good level of knowledge on the organisation.

Any advice would be greatly appreciated.

Thanks.

Just checked, see bold bit, and we are talking about $10k which is, as far as I am aware less than $50k so FIF does not come into it.

If I had a son and felt sufficiently generous to park $10k for him for 10 years then I would definitely go for diversity via a passive index fund or two covering either/or/some/all of NZ & ROW.

[Snoopy]

I'm not an expert and don't pay FiF, but page 15 talks about the 'amount' of your foreign investments being under 50k. 'Amount' is defined in the glossary as the cost - even going so far as if you inherit foreign shares, the 'amount' of them is the initial cost the deceased person paid. You do not appear to have to continually value your holdings if you leave them alone.

@mfd:
Page 15 spells it very clear. Once you breach the $50K value at anytime in the year, you have to do FIF.

SBQ, you have to look at the glossary, like mfd did, to see what the document means, which may not be the same meaning as the plain English meaning of those words. Breaching the $50k threshold in this instance refers to owning shares that you paid less than $50,000 for, then making another purchase that puts you over that $50,000 threshold. In this context your comments are correct. In the subsequent tax year, our hapless 'overseas investor' will come under the cloud of the FIF tax regime. But such a change is not retrospective. In the context of an 'overseas investment' rising from a cost below $50,000 to above $50,000 your interpretation of automatically coming under the FIF regime is not correct.

SNOOPY

P.S. I don't think mfd is right about inheriting shares at an historic cost. Once those inherited shares are transferred into your name you purchase those shares at the market price on the day of transfer as far as FIF is concerned. I remember the day FIF came in. I had purchased some overseas shares for about ten grand that had risen in value to over fifty. I got done under the FIF regime because those shares transferred into the scheme at market value on day 0 of the scheme, notwithstanding the much lower price I had bought them at.

[Snoopy]

If you trade the same stock multiple times, then you have a much more complicated 'quick sale' calculation to do.

Yes under the FIF regime that is right.

You do realise the FIF applies annually on the PAPER GAINS on the portfolio and applies on the TOTAL value (no exemption on the first $50K)?

Yes I do know that.

This is important because if say you're at retirement age and have say a $2M portfolio - you would be stuck with total taxable income of $100K. How many seniors have other sources of income to support paying this tax liability - assuming say 40% so $40K of income? The most likely scenario is the senior would be forced to sell some of their shares in the portfolio to meet the tax obligation.

Yes. However I believe that some US share registers at least will allow shareholders to unload quite a small parcel of shares at a reasonable cost to allow our "$2m man" to sell close to the number of shares required to meet their tax obligation.

SNOOPY