FIF investments, yay or nay?

[Kaspar]

I think it's generally accepted in investing circles that diversification is a good thing. It can be argued this is especially true for NZ which is a tiny blip on the world economic radar and our whole economy could be devastated by a single event e.g foot & mouth outbreak, Auckland volcano eruption, China problems etc

I'm still in my 20's and hopefully have many years investing ahead of me and it would not be out of the question for NZ to have some problems along the way, so it would make sense to have overseas investments.

But then we have the FIF rules. I've read you shouldn't make long term investing decisions based on tax as tax law can change and that the benefits of a well diversified portfolio should outweigh tax disadvantages over time. It might work well for some traders but for buy and hold investors I can't help but think, why bother?
It seems the dividends you receive would barely cover the tax in a year your FIF portfolio goes up. How can you create an income stream like that?

No wonder Kiwis stick to NZ/OZ stocks and property.

So does anyone have FIF investments (excluding Kiwisaver)? Do you think it's worth having them or not? or do you think NZ/Aussie is diversified enough?

[Harvey Specter]

My view is it is hard enough to keep track of NZ markets, let alone global. I keep my direct investing to NZ only.

If you want Global, buy into PIE's new Global fund before it closes or maybe the Platinum funds in Australia - I am sure there are other good ones out there but those are two I know of.

[Kaspar]

Thanks Harvey. Not really a fan of managed funds. Too many fees, I would prefer to buy a broad market ETF like VTS.ASX and only buy into it 2-3 times a year to minimise brokerage.

[Harvey Specter]

Nothing wrong with Index funds (except the ones in NZ that are a bit of a rip off). There are good ones on the ASX.

[Kaspar]

Yes I has some qualms about Smartshares when I was doing my initial research into NZ index funds, but I concluded that used along with their regular savings plan they are hard to beat for value if you want exposure to NZ and OZ markets. The fees are high compared to overseas ETFs but they don't have the scale of Vanguard and iShares. The VTS ETF has a fee of 0.05% but the underlying fund market cap is approx $US 270 billion! I found a good article a couple of weeks ago that puts some perspective on the Smartshares fees: http://www.goodreturns.co.nz/article...fees-real.html

Even with the relatively high ETF fees, Smartshares are still waaay cheaper than managed funds in NZ. Most are 1-2% MER. There seems to be major inconsistencies with how funds in NZ report their fees. Some might seem low but if you dig deeper that doesn't include trustee fee, admin fee etc.

Index investing for overseas shares doesn't seem viable though, because the ETFs on the ASX will fall under FIF rules and then you get dicked by the taxman.

[Lizard]

I love the FDR method under the FIF rules. In my view, it produces fewer inadvertent distortions in behaviour than other forms of taxing investments - even more so if it could be applied to every asset, including the family home, although perhaps reduce the overall %.

I always try to stay above the $50k de minimus that applies to individuals, despite the fact that every year at least one of my small-cap aussie shares will move into the All Ords and become exempt.

Like many NZ investors I struggle to draw the line between a tax-efficient "investing" portfolio in which capital gain is untaxed and more speculative trading activity on which I pay tax on total profits including both dividends and profit on sale (effectively, capital gain). By trying to restrict my occasional speculative impulses mostly to those shares that fall under FIF, my trading portfolio is mostly taxed as though I had made 5% per annum (tax of about 1.6% depending on marginal rate). Should I happen to discover I've hit on the FIF equivalent of XRO at 70cps, I do not need to fret that purchasing it can only have been justified in anticipation of profit on sale and that I therefore should be paying tax at my marginal tax rate on the entire 5000% capital gain when I sell. Nor do I have to worry that when I then have a loss-making trading year and declare it, the IRD may be encouraged to consider whether I should instead be classed as "in the business of dealing in shares" and demand tax plus penalties on my last 7 years of investment capital gains. The rules under FIF are much clearer and fairer - if I turnover my trades in under a year, I pay more tax which discourages me from over-trading, but not enough to addle my decision making. I am encouraged to find dividend paying stocks rather than speculating purely for capital gain, as at dividend levels above 5%, I pay less tax than I would if the investment was exempt.

This is not to say that in certain circumstances someone using FIF could not still be found to be dealing in shares and receive a demand for tax on realised profits from their exempt investments, but it seems to me that for the genuine investor with the occasional speculative urge, trades that fall within the FIF regime and have been taxed correctly are going to be a fairly safe place to play. In addition, provided they are successful in their trading, FIF may well prove more tax-efficient.

The biggest nuisance is finding a good way to track buys and sells and calculate the deemed income accordingly. Good knowledge and spreadsheeting skills required to do this accurately - presumably the IRD still have a calculator if you want to attempt it, but still need good records at year end to do so. Otherwise Sharesight seems the simplest way to go.

[Kaspar]

I thought you might reply Lizard, I've seen you post in favour of the FDR before . That's also why I mentioned it works well for some traders. But if you didn't trade and built up a holding in a US market ETF for income it doesn't look good. e.g low overseas divi of approx 2%, approx tax 1.6%, leaves investor 0.4% of actual cash in hand lol. It just doesn't seem worth it.

[Kaspar]

That's true KW, and if the value goes down from the previous year you don't have to pay any tax so there are some positives. But do you think the overseas diversification is worth it or better to stick with NZ/OZ with the tax advantages & high dividends? I think the future is bright for NZ/OZ but a lot can change in the coming decades.