Interest Deduction against FIF income

[lou]

I guess that would partially offset the disadvantage of having to pay tax on recovering your original capital in subsequent years.

Do you have to pay tax on recovering your capital? I thought under the FIF regime you end up paying 5% tax on your opening book value then and that was it (FDR rules assuming your investments are increasing in value).

I would say the worst part of your plan is the 100% margin loan. I believe the underlying investment (overseas shares, or for that matter any shares) is too volatile for this to work in the medium term. I would describe a 20% margin loan as extremely aggressive.

It would not be margin loan but a loan over personal property. While the FIF investments would be purchased using 100% debt financing, the global view would reveal a conservative debt ratio.

Think of it this way. All sharemarket listed entities have a responsibility to their shareholders to be 'capital efficient'. A well run company will borrow money to achieve this. What you are really saying by borrowing money to invest in shares is that you believe the underlying shares are not optimally 'capital efficient' and that you can borrow more money against the fixed income stream from the underlying share to achieve a better result. On rare occasions you might be right. But in the general case you are saying that you know more about how the underlying business than management do. To me this kind of thinking is a bad bet.

The other-way of thinking about it is that I am arbitraging the cost of debt and cost of equity. Since the cost of debt is < the cost of equity in the long run you should make a profit. The cavet to this is "Markets can remain irrational a lot longer than you and I can remain solvent."

The FIF regime is I believe negative from an NZ investor return perspective. If you can find a high growth index included company for example in Australia (not subject to FIF) that is growing faster than some investment in the US (or whatever FIF country you care to substitute) from a post tax perspective you are likely to be better off by putting your money in that Australian company. To me it now makes sense to get international exposure by looking at NZ/Oz exporters (the are some locally listed companies that earn almost all of their income outside of NZ/Oz) rather than trying to buy into some FIF overseas growth story.

I may be wrong however. My understanding is that under the FDR rules you will pay a 5% of your opening book value as FIF income. So if you have an Australian company that returns a net dividend of 10% you will have to include the full 10% in your tax return. If that same company was a US company you would only include 5% FIF income in your tax return. I guess if your Aussie company pays no dividend you will be better off. In the long run it should balance out.