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  1. #21
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    Quote Originally Posted by Jessie View Post
    If the Macquarie CMT was included under the FIF scheme as originally seemed the case, it is easy to calculate the tax owing - just multiply the balance at 1 April by 5% and multiply by you tax rate (except when total income from overseas investments is less than 5% when you must calculate actual income).
    Jessie, the FIF regime has two principal options under which your income may be calculated, for listed investments. These are the fair dividend rate (FDR) and the comparative value method (CV). You can switch between one or the other between income years. However, for any particular income year you must choose one or the other method which must apply over *all* of your FIF investments. The method you have outlined (5% of opening balance times your marginal tax rate) would be the FDR tax assessment.

    You are correct in saying that the FDR way of doing things is easier than the CV method. However it isn't quite as straightforward as you make out. You still have to work out the tax paid from interest withheld each month. That's because the tax paid can be offset against the deemed FDR tax assessment. In this particular year (31st March 2007 to 31st March 2008) there has been quite a drop in the NZD:AUD exchange rate of some 10%. Under the CV method this exchange rate gain is counted as 'deemed income'. 10% of the opening balance is clearly greater than the actual gross interest you would have received (unless you put in a large deposit into your CMT after 1st April). That means if your CMT balance was roughly the same between years start and years end, then you would be a fool to use the CV method when the FDR method will give you a lower tax bill. In this instance, if the Macquarie CMT was your *only* FIF qualifying investment I think your point that the FDR is relatively easy to calculate is valid Jessie.

    However, the FIF regime applies to *all* of your FIF qualifying investments *collectively as though they were a single investment*. So it may be obvious (in this rare case where the cumulative exchange rate gain is greater at all times than the instantaneous gross interest received) the FDR rate is the way to go for the Macquarie CMT investment in FY2008. But that does not mean you should not use the CV method for FY2008, because that depends on what other FIF investments you have. So in general you would have had to do the CV calculation as well, even on the Macquarie CMT this year, if it had not been exempted..

    Under the IRD ruling to exempt it from FIF, initial and final balance and all transactions must be converted into NZ dollars and any increase in value must be taxed. Is this true? If so, this is a bit more of a nightmare to calculate than the FIF system.
    If the Macquarie CMT is exempted, and it has been, you only need to declare your interest payments and claim back any withholding tax paid, exactly the same as in previous years. You still have to do the exchange rate conversion on your interest payments. But there is no requirement to include any adjustment to the capital value. The method you are describing Jessie:

    "initial and final balance and all transactions must be converted into NZ dollars and any increase in value must be taxed."

    is part of the CV method of the FIF regime. It does *not* apply to the Macquarie CMT or any other exempt investment.

    SNOOPY
    Last edited by Snoopy; 22-05-2008 at 09:54 AM.
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  2. #22
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    SNOOPY, thanks for your detailed reply. I have a Macquarie CMT account so am particularly interested in this matter. I also have more than $50,000 (purchase price) of other overseas investments. Given the poor general performance over the last year, I have an overall negative return across all these investments. Therefore, under the CV method I pay zero tax this year. According to the letter sent recently by Macquarie, the CMT is exempt from the FIF in FY2009 and can be exempt also in FY2008 if desired. Clearly it is in my interests to include it in the FIF this year and pay zero tax. Do you agree with this?

    A couple more questions:

    1. As noted above, CV is zero this year. But can I deduct withholding taxes from FIF investments from my other income?

    2. You say that in future Macquarie CMT will be exempted, and "you only need to declare your interest payments and claim back any withholding tax paid, exactly the same as in previous years." However, I recently read a comment from some sharebroker's newsletter (I can't remember exactly where) that foreign currency accounts have actually always been taxed on exchange rate gains or losses (ie, as in the CV method), but that 90% of tax payers have always ignored this requirement. Is this true?

  3. #23
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    Default Credits for foreign tax paid on FIF investments

    Quote Originally Posted by Jessie View Post
    As noted above, CV is zero this year. But can I deduct withholding taxes from FIF investments from my other income?
    This year's IR3 and IR3 Guide are quite confusing on this point. The guide says:

    After you’ve converted the amounts to New Zealand dollars, add up the overseas tax paid and print the total in Box 17A (Total Overseas Tax Paid).

    Based on that you would expect the foreign tax that you have paid to be used as a credit against tax due on your other income. However the guide also says:

    ... the foreign tax deducted from the dividend can be claimed as a credit against the tax payable on the calculated FIF income

    and

    If you paid tax overseas you can claim it as a credit against your tax. The amount of credit you receive is the lesser of the actual amount of tax paid on the overseas income or the amount of tax you would pay in New Zealand on the same amount of income.

    The first statement is saying that the foreign tax that you have paid can only be used to reduce the tax payable on your calculated FIF income, it can't be used to reduce the tax payable on your income arising within New Zealand. Using the CV method the majority will find that their calculated FIF income is zero, so the amount of credit you can claim for the foreign tax that you have paid is also zero.

    The second statement seems to confirm that. If the calculated FIF income is zero, then the amount of tax you would pay in New Zealand on the same amount of income would be zero and the amount of credit you can claim for the foreign tax that you have paid is also zero.

    If this is the case, then you should actually enter zero in Box 17A of the IR3 rather than the total of overseas tax paid. However it would be good to see something from the IRD to confirm that is the case.

  4. #24
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    Quote Originally Posted by Deev8 View Post
    This year's IR3 and IR3 Guide are quite confusing on this point. The guide says:

    After you’ve converted the amounts to New Zealand dollars, add up the overseas tax paid and print the total in Box 17A (Total Overseas Tax Paid).

    Based on that you would expect the foreign tax that you have paid to be used as a credit against tax due on your other income. However the guide also says:

    ... the foreign tax deducted from the dividend can be claimed as a credit against the tax payable on the calculated FIF income

    and

    If you paid tax overseas you can claim it as a credit against your tax. The amount of credit you receive is the lesser of the actual amount of tax paid on the overseas income or the amount of tax you would pay in New Zealand on the same amount of income.

    The first statement is saying that the foreign tax that you have paid can only be used to reduce the tax payable on your calculated FIF income, it can't be used to reduce the tax payable on your income arising within New Zealand. Using the CV method the majority will find that their calculated FIF income is zero, so the amount of credit you can claim for the foreign tax that you have paid is also zero.

    The second statement seems to confirm that. If the calculated FIF income is zero, then the amount of tax you would pay in New Zealand on the same amount of income would be zero and the amount of credit you can claim for the foreign tax that you have paid is also zero.

    If this is the case, then you should actually enter zero in Box 17A of the IR3 rather than the total of overseas tax paid. However it would be good to see something from the IRD to confirm that is the case.
    Once i've completed my spreadsheet & 2008 tax return, i'll post some more on the inner workings.

    This is a mess, & as an Accountant i believe this area needs simplification

    It must affect far more people than the Govt intended?

  5. #25
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    Further to my previous comment about macquarie CMT, here is a quote from the March MoneyOnline newsletter htp://moneyonline.co.nz/newsletter/mar08/nlmar08.htm#tax
    This indicates that in future, the CMT must be taxed under the CV method, ie, foreign exchange effects on all transactions should be included in the calcuation, not just on interest received.

    "Macquarie Cash Management Trust Gets IRD Determination

    This fund (MCMT) is quite widely held by New Zealand residents and it is a convenient Aussie dollar denominated transaction facility. It is useful for receiving Australian dividends and other distributions and settling share transactions but it pays a rate of interest above bank call rates.

    Inland Revenue have made a determination (8 February) that taxation of this FIF (see inset for jargon) shall not be under the FDR method but investors should use the CV method. We are not convinced that many investors will understand the implications of this change.

    Taxation of MCMT prior to introduction of the new FIF rules was simple enough. You paid tax on the distributions (converted to NZ dollars). No tax was payable on gains or losses in the unit price because the IRD treated the investment as a "share". The unit price is fixed at A$1.00 - but of course its value fluctuates in NZ$ terms.

    Enter the new FIF rules. MCMT becomes subject to the FDR method of taxation. That is complicated in itself, but it is (was) also subject to "quick sale" calculations. Because most people use this as a transaction account, quick sale tax calculations had the potential to become a nightmare.

    Macquarie, with the best of intentions, applied to IRD to remedy this situation and received a determination that the FDR method was not applicable and that investors should use the CV method - exclusively (quick sale rules do not apply). For the tax year ending March 2008, investors can choose either FDR or CV but after that, only the CV method should be applied.

    Macquarie have written to all investors and advised them of the change. They also said that investors should apply CV method of taxation to "actual income received and all realised and unrealised currency gains". And went on to say this was comparable to the "taxation of an investment in an Australian bank account".

    In our view it is highly unlikely that most investors who actually have an Aussie or any other offshore bank account actually make correct tax calculations.

    And this is the problem. We'd wager that most simply pay tax on the interest and return nothing for realised and unrealised currency gains on capital - or any interest re-invested.

    Offshore bank accounts or other "debt" securities are known generally as "financial arrangements" and have long been subject to taxation on realised and unrealised gains that result from currency movements. And likewise, any losses have been deductible. These are not new rules. They have been around for a long time and, we suspect, ignored by individual investors.

    In short, if you own MCMT, and are not exempt under the FIF de minimis rule, you still have a more complex calculation for MCMT than for previous years.

    Note: Investors in MCMT wanting to calculate the total cost of their FIF investments for the purpose of ascertaining whether they are exempt from the FDR rules, (de minimis) should still include MCMT. While MCMT itself is no longer subject to the FDR rules, it is still an FIF."

  6. #26
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    this all looks so confusing. Sharebroker says will hold all stocks in trustees account and process all dividends and supply tax summary for end of financial year for .35%. Is this worth it????

  7. #27
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    Quote Originally Posted by Jessie View Post
    SNOOPY, thanks for your detailed reply. I have a Macquarie CMT account so am particularly interested in this matter. I also have more than $50,000 (purchase price) of other overseas investments. Given the poor general performance over the last year, I have an overall negative return across all these investments. Therefore, under the CV method I pay zero tax this year. According to the letter sent recently by Macquarie, the CMT is exempt from the FIF in FY2009 and can be exempt also in FY2008 if desired. Clearly it is in my interests to include it in the FIF this year and pay zero tax. Do you agree with this?
    The tax laws are set by the NZ Government, and interpreted by the Inland Revenue Commissioner Jessie. Not Macquarie. What is the date on your letter from Macquarie?

    Have you seen the FDR2008/2 issued on 8th February 2008 by the Commissioner of Inland Revenue? That specifically states that for the Macquarie Cash Trust, the FIF regime is *not* to be used.

    I am in a similar position to you with a "BT Hi Yield account", but with an overall loss on my FIF portfolio for FY2007-2008. It would really suit me too, to use CV and wrap the BT Hi Yield account in there. But I can't find any way to legally do it.

    A couple more questions:

    1. As noted above, CV is zero this year. But can I deduct withholding taxes from FIF investments from my other income?
    Ultimately it comes down to what is written in the taxation legislation Jessie. Have a look at the "Taxation (Savings Investment and Miscellaneous Provisions) Act 2006." It is 221 pages long and covers all sorts of stuff. That act in itself is an amendment to the "Income Tax Act 2004" which is even longer.

    My answer to your question is: "I don't know."

    But I do hope to find out - for my sake!

    2. You say that in future Macquarie CMT will be exempted, and "you only need to declare your interest payments and claim back any withholding tax paid, exactly the same as in previous years."
    No, I am saying that the Macquarie CMT is not part of the FIF regime - period. Not this year and not next year, despite what Macquarie might have told you.

    However, I recently read a comment from some sharebroker's newsletter (I can't remember exactly where) that foreign currency accounts have actually always been taxed on exchange rate gains or losses (ie, as in the CV method), but that 90% of tax payers have always ignored this requirement. Is this true?
    I think it was true if you had a foreign bank account that was outside one of the grey list countries it was subject to the old FIF regime. I also think that this might have been an unintentional effect of the old FIF legislation, which might explain why the IRD did not go around following these 'breaches' up.

    OTOH, If you are a declared foreign currency trader, then I think that the net change in your foreign currency account would be assessable, both then and now. That's because you would have opened the account with the specific aim of making a profit on foreign currency trades. However, I have had foreign currency accounts in USD and GBP with the National Bank of New Zealand over FY2007-2008, and I am not a currency trader.

    This year FY2007-2008, as usual, the National Bank sent me a tax summary. There was no suggestion in the summary that I had any tax obligations (gains or losses) over and above the interest I had earned on those foreign currency accounts.

    If you look at the April 2008 IRD Tax Information Bulletin on page 111 you will see that one of the exemptions to Australian unit trusts coming under the FIF regime include unit trusts that distribute over 70% of their income and use a RWT proxy. Granted this covers only Australian unit trusts. But the thinking behind it is that an investment that distributes 70% plus of its income to the unitholders and pays tax at source is not some kind of income sheltering tax dodge. In summary, I can't see the IRD going after legitimate overseas bank accounts from a 'capital gains' perspective, old FIF regime or new FIF regime.

    SNOOPY
    Last edited by Snoopy; 22-05-2008 at 09:33 PM.
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  8. #28
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    Quote Originally Posted by Snoopy View Post
    The tax laws are set by the NZ Government, and interpreted by the Inland Revenue Commissioner Jessie. Not Macquarie. What is the date on your letter from Macquarie?
    Ah so it was a newsletter from 'moneyonline', not Macquarie itself? But it was dated March which was after the FDR2008/2 had come out.

    Have you seen the FDR2008/2 issued on 8th February 2008 by the Commissioner of Inland Revenue? That specifically states that for the Macquarie Cash Trust, the FIF regime is *not* to be used.
    ... or did it say that the FDR calculation is not to be used? It is getting too late. I shall go to the IRD website tomorrow and look it up again to see what the real story is.

    SNOOPY
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  9. #29
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    I finally received my IR3 form in the mail yesterday and was dismayed to find that if I held foreign shares, I "may be required to complete a disclosure form for interests in a foreign company" and that I needed to call 0800 377 774 to get the appropriate disclosure form. No name or number was given for the form and I could not find such a form on their web-site.

    So to spare anyone else 20 minutes of listening to random, unsolicited tax advice, nodding off to dreary music and confusing the IRD call centre staff, I can pass on the answer I eventually received - that is that the form should be available on the web-site in late May (i.e. any day now) and will be called "IR477". If and when I am able to locate this form and determine its purpose, I will post a link here!

    I am rather worried that they may expect one form per interest held or traded - especially since the IR3 has space for up to 3 digits in recording the number of disclosure forms attached! Let's hope that nightmare scenario doesn't constitute reality.

  10. #30
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    Quote Originally Posted by Lizard View Post
    I finally received my IR3 form in the mail yesterday and was dismayed to find that if I held foreign shares, I "may be required to complete a disclosure form for interests in a foreign company" and that I needed to call 0800 377 774 to get the appropriate disclosure form. No name or number was given for the form and I could not find such a form on their web-site.

    So to spare anyone else 20 minutes of listening to random, unsolicited tax advice, nodding off to dreary music and confusing the IRD call centre staff, I can pass on the answer I eventually received - that is that the form should be available on the web-site in late May (i.e. any day now) and will be called "IR477". If and when I am able to locate this form and determine its purpose, I will post a link here!

    I am rather worried that they may expect one form per interest held or traded - especially since the IR3 has space for up to 3 digits in recording the number of disclosure forms attached! Let's hope that nightmare scenario doesn't constitute reality.
    I operate my trading through a company (Got IR4 early April) and in my accounting records I had split my trading between "normal" and FDR share transactions, so I had the numbers readily available to plug into the tax return.

    I was unsure if I needed to complete a disclosure form, or what type of form (looked up IRD website) so I went through the phoning excercise, and like Lizard, waited for about 20 minutes, and after explaining my question (and IRD staff talking to their technical people) I was told they would get someone from their "smarter than us" division to call me back.

    When IRD got back to me, they said there was no appropriate form, and just put in the IR4 return, and don't complete any disclosure form, so that's exactly what I did, I included FDR income in the tax return, and didn't make any additional disclosures.

    Since then assessment was issued, and the companies 2008 tax refund is in the bank (Paid too much provisional tax)

    PS: I like this FDR tax, as I end up paying far less tax on my "speccy" ASX shares ! Thank you Dr Cullen et al.
    Last edited by kura; 23-05-2008 at 09:25 AM.

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