I wouldn't have thought that the FIF regime is much worse than anything else depending on your return on investment. Assuming you are on the top tax rate of 33% tax will eat 33% of your net taxable earnings no matter what the investment. What is the difference between paying tax on a dividend earning company in NZ that has minimal growth or paying tax on 5% of the value of a FIF investment assuming (you would hope for the risk involved) it will generate growth of at least 5% or more but pay next to no dividends. Like you say if the FIFs grow by less than 5% use the CV method and no tax to pay if it goes backward (although you will have to pay tax on the regrowth which is the real unfair part of the FIF regime).
You could buy a dividend paying company on the ASX that is on the exempt list. You pay tax on the dividends(no franking credit allowed, come on Aussie remember CER). The FDR is just a replacement for dividends. You are right to worry about tax but I would be more concerned with finding an investment that is going up instead of down. Any growth over 5% is tax free on your FIF.
That said I would also like to hear how other people invest overseas particular in passive/index funds.