FIF Tax Regime - Any Spreadsheets?

[Aaron]

Aaron; if you are a deliberate and active trader, then there is no requirement under the tax legislation to operate under the FIF regime.
Moreover, I would imagine a (successful) trader would not be highly motivated to elect to do so, especially when the alternative is far simpler, transparent & tidier from a compliance perspective.

Are you sure?

The FIF regime was included in the Income Tax Act which I would have thought meant it overrides the normal calculation of profit for investors and traders alike.

Pretty sure earlier discussions on this site came to the same conclusions.

What is your basis for stating there is no requirement under the tax legislation. If you have a Foreign Investment Fund (which includes shares in foreign companies) the Income Tax Act would appear to have imposed the FIF regime on you when calculating your income on FIFs.

It would be a whole lot easier just taking sales less opening stock and purchases and add closing stock to work out a profit figure but I do not think this would be correct for FIF investments.

Interested to know what your view is based on.

[Aaron]

Assuming you are using the FDR and the quick sale adjustment. You use "the lesser of the peak holding method amount and the actual gain".

If your actual gain is a loss can you offset this loss against income from other FDR calculations with other companies?

The IRD guide clearly states this OK for the CV method but has no specific examples for the FDR method.

I think I answered my question, if you go to the IRD calculator it provides $0 rather than a loss. Pretty harsh, paying tax on gains but no allowance for losses.

A comprehensive across the board capital gains tax and we can do away with the FIF rules altogether. Maybe TOPs equity tax is our best bet at the next elections.

[FTG]

Are you sure?

The FIF regime was included in the Income Tax Act which I would have thought meant it overrides the normal calculation of profit for investors and traders alike.

Pretty sure earlier discussions on this site came to the same conclusions.

What is your basis for stating there is no requirement under the tax legislation. If you have a Foreign Investment Fund (which includes shares in foreign companies) the Income Tax Act would appear to have imposed the FIF regime on you when calculating your income on FIFs.

It would be a whole lot easier just taking sales less opening stock and purchases and add closing stock to work out a profit figure but I do not think this would be correct for FIF investments.

Interested to know what your view is based on.

My level of confidence is high Aaron.

But please don't allow that confidence, or for that matter any other supporting or conflicting assertions on this forum, as a basis from which you make decisions on how to arrange your personal tax & financial affairs.

DYOR - diligently!

IMHO I reckon you will find any professional trader is likely to have carved out their "trading activities" into a specific stand-alone entity. The Tax Accounting methodology deployed for that entity type is quite likely to be more nuanced. Especially compared to what is required & deployed by a hobbyist or more "casual" Investor-Trader.

One word that possibly sums up the average kiwi investor-trader's dilemma, whether it be with overseas investment/FIF or domestic investment, is: "Tainting".

[Aaron]

My level of confidence is high Aaron.

But please don't allow that confidence, or for that matter any other supporting or conflicting assertions on this forum, as a basis from which you make decisions on how to arrange your personal tax & financial affairs.

DYOR - diligently!

IMHO I reckon you will find any professional trader is likely to have carved out their "trading activities" into a specific stand-alone entity. The Tax Accounting methodology deployed for that entity type is quite likely to be more nuanced. Especially compared to what is required & deployed by a hobbyist or more "casual" Investor-Trader.

One word that possibly sums up the average kiwi investor-trader's dilemma, whether it be with overseas investment/FIF or domestic investment, is: "Tainting".

So as not to confuse the issue I understand there is a distinction between a trader and a long term investor.

I am just unsure where you got your information as to why a trader is not subject to the FIF rules.

Where did you do your research and get the information?

Just wanting to know what information is out there to provide you with a high level of confidence. It might instil in me the same level of confidence if I can read it from a number of other sources.

[SBQ]

So as not to confuse the issue I understand there is a distinction between a trader and a long term investor.

I am just unsure where you got your information as to why a trader is not subject to the FIF rules.

Where did you do your research and get the information?

Just wanting to know what information is out there to provide you with a high level of confidence. It might instil in me the same level of confidence if I can read it from a number of other sources.

I can't express enough how confusing IRD has made with foreign investments under FIF. There are so many exceptions. For eg. PIE funds, regardless of being active or passive index managed, still pay tax at the investor's RWT income tax rate up to a maximum of 28%. You have active managed funds that trade frequently on a daily basis, but still report gains to IRD and pay tax at the RWT rates. Then you have investing portals like Sharesie and Hatch, where investors are bound by FIF. It's all very confusing and there's little transparency involved. Those that are under Kiwi Saver schemes have a tax liability every year on the paper gains (if under FIF or not). While those with a total of less than $50K invested, do not have to report their gains or deal with FIF. But the minute they invest in a managed fund, regardless of amount, they have a tax liability.

There is simply no straight level of confidence when it comes to taxation here in NZ. Hence why my accountant informs me that you can go to IRD and ask all these questions about FIF (especially in the area of derivative options trades) and they will most likely come back clueless ; citing "go see an accountant". My accountant says the bottom line is simple. When you file to IRD using a reputable accounting firm, you are least likely to be questioned on your tax return. The rules around FIF are complex the say the least. Quick sales adjustment, comparative rate, FDR, all are designed so the accountant can charge more money in determining the best outcome (as it's you the tax filer has to pay for their time to make those extra calculations to see which is the lowest tax liability from year to year). It's inefficient compared to Aus or Canada where they base capital gains tax on actual sale of the assets (not paper gains).

The crux of the issue as i've mentioned before, the avg person living in N. American in a pension / savings investment plan will have MORE wealth than the same person living in NZ investing into the SAME assets (but under a NZ style scheme). The difference is purely based on taxation planning (for which in NZ there's none of that). Kiwi Saver plans are taxed year after year with the intention that at retirement, those funds are withdrawn tax free. In Canada, 'tax free compounding growth' applies and at retirement, it's up to the individual to decide 'how much' they want to sell in their retirement fund - and elect what taxable income they desire. Most pensioners have no other source of income so making disbursements out of their retirement fund is tax effective by keeping them in a low tax bracket.

Don't believe how punitive FIF is ? Consider what Jack Bogle has said in terms of robbing compound gains (referring specifically to high management fees charges by funds); this is no different than IRD charging the 5% FDR year after year but no credit on the years of loss, so on the rebound, FIF taxes it again (which is probably more punitive than what Mr Bogle is getting at).

https://www.theglobeandmail.com/glob...ticle11578254/

Frontline interviewed index fund pioneer John Bogle, who compared the performance of two hypothetical equity portfolios – one earning 7 per cent, and the other earning 5 per cent (7 per cent less 2 per cent in fees).

Two per cent may not seem like much in any given year. But over a long time period, the impact is enormous: Assuming a 50-year horizon, the second portfolio would have lost 63 per cent of its potential returns to fees, Mr. Bogle said.

"What happens in the fund business is that the magic of compounding returns is overwhelmed by the tyranny of compounding costs. It's a mathematical fact," he explained.

[Aaron]

Just wanting to know what information is out there to provide you with a high level of confidence. It might instil in me the same level of confidence if I can read it from a number of other sources.

FTG have you gone back to being a quiet observer? Genuinely wanting to know what information you have that gives you a high level of confidence.
I suspect people can do whatever they like as very few people in IRD will be able/want to check and if you are calculating profit in a manner that makes sense such as sales-purchases-opening stock+closing stock then it is hard to see IRD being too upset about it.
But if you wanted to be pedantic you would have to go to the legislation. It might raise issues in a downturn as FIF losses can't be offset against other income. IRD might take an interest if trading losses were offsetting other income.

[FTG]

FTG have you gone back to being a quiet observer? Genuinely wanting to know what information you have that gives you a high level of confidence.

LOL. I have been head down, earning my way Aaron, being productive, and providing financial support (via various taxes) for the ~50% of kiwi's who continuously suckle on the government's teats. Like many on ST, I'm busy trying to help keep the country away from being categorised as a Banana Republic at some point!

It seems SBQ has made a good attempt to answer some of your questions and point you in the same direction that I already have. Let's face it, we don't have any real appreciation of your financial situation & set-up, and you certainly don't have any on mine. Appropriate tax structuring for one taxpayer might not be appropriate for another, and vice-versa. Respectfully, I don't think I can effectively add any detailed tax advice/comment/value to you, via this forum.

However to summarise some key takeaways for you...

- Most agree, accountants included, that everything FIF related is a large dog's breakfast.
- I'm not encouraging or condoning tax EVASION.
- However encourage & support taxpayers structuring their tax affairs in a way to avoid unnecessarily paying too much tax.
- Tax law can be complicated & contradictory in interpretation. Yes, there is the Black & White. But, there are also a few shades of Grey.
- The IRD continues to vastly improve their technology stack, especially with the utilisation of AI/Algo's. Additionally, the amount of tax activity reporting required from financial institutions (domestic & foreign) continues to increase. Inter-agency, interjurisdictional .
- As a result, if a tax entity (including an individual) purposely, negligently or ignorantly evades paying tax it is now quite possibly just a matter of time before you will receive the "knock on the door". Especially if you are a "bigger" Fish!
- When attempting to interpret & understand tax law, just as in when determining whether to directly invest in a particular company or not, DYOR - Diligently. Crap research & study, likely leads to crap outcomes.
- If your overseas financial assets are well in excess of $50K, then a few dollars invested in receiving sage advice from a tax accountant or similar, can be very worthwhile.
- Keep in mind that advisor will ideally need total visibility of your financial situation. Including but not limited to; how you have structured your affairs and what your past, present & future financial actions & intentions are. As in are you Investing, Trading etc.

Trust that helps!
FTG

[Aaron]

FTG appreciate the reply, I still think the FIF regime would override normal ways to measure profits when it comes to trading in overseas shares though, as I do not have anything specific to counter that view.

Although that said I imagine for a smaller trader your methods for calculating profit are unlikely to be looked at by IRD.

I don't suppose anyone on ST has had any personal experience with the FIF rules and IRD??

[777]

Not an authority but believe trading is trading and profit calculated accordingly. FIF relates to investing.

[Aaron]

Not an authority but believe trading is trading and profit calculated accordingly. FIF relates to investing.

My question is not about the distinction between trading and long term investing and how profit would normally be calculated depending on where you fit.

The question is whether a share trader in NZ, trading shares on the US stock exchanges would account for profits per the FIF rules or whether they could calculate profit as a trader in NZ shares would normally calculate profit. (i.e. sales les purchases less opening stock plus closing stock)

I would contend that the definition of a FIF per the income tax act is
EX 28Meaning of FIF is any of the following (a) a foreign company:

That means the FIF rules would override normal profit calculations. FTG is confident this is not correct but cannot point to a piece of legislation or discussion paper to back this up. I would contend that this is the case but because the FIF rules can be very time consuming and if you are calculating profit in a reasonable way IRD is not likely to challenge you.