Foreign Investment Fund (FIF) taxes

[Ricky99]

Hi - do any other kiwi's get stung with this every year and get a little peeved off by it? Was considering now whether I gift all my shares into a trust (now that gifting is "free") and then pay the revenue (FIF revenue) out to my two year old son every year so that the income gets taxed at a far lower tax rate. Anybody else trying to work out better ways of minimising their FIF exposure?

[Lizard]

I like FIF. Don't have to worry about deciding whether I'm a trader or an investor in my intention. Tax is very low when compared to what trading in these shares would cost me.

[Aaron]

The FIF rules were to get some tax from investments in Amercia where they don't pay much in dividends and look for capital growth. If we had a comprehensive capital gains tax we could do away with this altogether the sting might be worse though.
Ricky99 your lucky to have been stung with this every year as a lot of people would have paid nothing using the CV method during the turbulent times. If you can find a FIF investment that pays a 10% dividend you can get 5% tax free assuming it doesn't change in value from year to year.
I would check with your accountant as I think you will find an underage/minor beneficiary will be on a very high tax rate.

[Snoopy]

Hi - do any other kiwi's get stung with this every year and get a little peeved off by it?

Yes I am peeved by the system, and I think it is intellectually flawed. However there is a legitimate legal way around it. Get your overseas exposure by buying exporters based in NZ and Australia (listed on NZX and ASX) who sell into world markets. Don't buy stuff listed outside the NZX and ASX.

Was considering now whether I gift all my shares into a trust (now that gifting is "free") and then pay the revenue (FIF revenue) out to my two year old son every year so that the income gets taxed at a far lower tax rate. Anybody else trying to work out better ways of minimising their FIF exposure?

I don't think that plan would work. An NZ trust is still a legal entity that would have to pay the FIF tax. Whether or not you paid any of that trust 'income' (which contains no imputation credits) onto a third party would not affect the amount of tax your trust paid, I would have thought. In fact you may even increase your tax liability by doing this.

SNOOPY

[Anonymous]

I like FIF. Don't have to worry about deciding whether I'm a trader or an investor in my intention. Tax is very low when compared to what trading in these shares would cost me.

Lizard, just to clarify, has FIF done away completely with the whole trader/investor issue? i.e one can now trade as much as desired and only pay FIF 'capital gains' tax?

[Ricky99]

It just seems so random that you have companies in the ASX 300 that never pay dividends that are exempt and then companies outside the ASX 300 that pay dividends that are included...

also peeves me that we pay capital gains but you can play in the real estate market without paying it (although am happy that the depreciation on housing is gone!)

[Lizard]

Lizard, just to clarify, has FIF done away completely with the whole trader/investor issue? i.e one can now trade as much as desired and only pay FIF 'capital gains' tax?

My understanding is that there is no trader/investor distinction for investments under the FIF rules. Both require you to use one of the available options to determine income - which for the individual roughly boils down to comparative value (as you would pay with capital gains, but no losses) or Fair Divdend Rate which assumes you made 5% pa (or 5% per trade on quick sales). The only people likely to end up paying more tax under FIF than on exempt shares are those who consistently make losses or those who buy and hold non-dividend or low-dividend speculative stocks (and therefore are more than likely investing with the intent of making a capital gain and therefore arguably should be paying tax as though trading anyway).

However, it doesn't do away with trading altogether as there are many exempt stocks that can be traded (i.e. NZ incorporated companies and most ASX all-Ords) and also those individuals who don't meet the $50k per person de minimus (based on purchase price) would still be considered to be trading if they acquired with intent to make a gain on sale.

The only thing I don't like about FIF is that it makes recording complex because the records need to be kept a bit differently, so end up with lots of different types of investments recorded in different ways. Personally, I'd prefer a low Fair Dividend Rate on everything rather than CGT, as I think it is less distortionary and rewards investors for making a good return on their capital - which would tend to encourage wise investment. If there is one downside to that, it would be that because no losses can be claimed, it is not such a good way to get long term investment in ventures that are likely to be loss-making in the early years.

[Anonymous]

Thanks Lizard. I guess my question is, does the investor/trader distinction apply to each share individually or the portfolio as a whole? I.e. as you say, for FIF shares you are now paying income tax on CV/FDR regardless so you can trade as frequently as you want. But if you do trade these stocks frequently does that then tarnish the rest of your portfolio and therefore make your FIF exempt NZX/ASX 300 stocks subject to CGT as well, even if these are long-term investments?

[Jay]

One thing to note where FIF is not applicable we do not pay CGT - The profit you make on the sale of shares is deemed income- appears to the same thing but is not for a number of reasons.
I am also not sure on whether FIF threshold applies per share or your collective holdings as at the start of the tax year?

[Snapper]

If a trust pays out more than a $1000 income to a minor beneficiary then the amount over $1000 is taxed at 33% (unless the trust is a testamentary trust or there are other special circumstances). As far as the FIF regime goes I bet its resulted in a net tax loss for the govt so far.