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  1. #1
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    Default Interest Deduction against FIF income

    Are you allowed to claim interest expenses if you are investing into FIF investments?
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  2. #2
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    In my opinion I think you are allowed to deduct expenses that relate to generating FIF income but it would be best to talk to an accountant though.

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    Quote Originally Posted by Aaron View Post
    In my opinion I think you are allowed to deduct expenses that relate to generating FIF income but it would be best to talk to an accountant though.
    Thanks Aaron,

    Do you have any FIF investments or are you coming at it from a logical perspective.
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    Quote Originally Posted by lou View Post
    Are you allowed to claim interest expenses if you are investing into FIF investments?
    Lou, there is an implication in your question that any interest you pay in generating your income on your FIF investment is somehow tied to that FIF investment.

    In my tax return I declare various categories of income as outlined in my IR3 form. Then later on in the form there is a question about any expenses (including interest paid) I have incurred in generating that total income. There is no bracketing of interest paid against certain income streams. In my own case I just have all of my investments in my own name.

    You haven't really given any detail on how you structure your own investments. From my perspective your question cannot be answered, because the question itself contains inaccurate underlying assumptions. You might have to rephrase what it is you actually want to know.

    SNOOPY
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    Thanks Snoopy.

    This is a hypothetical question as I don't have any FIF investments yet, but planing to have them in the future.
    In terms of structure; FIF investments would be brought in my own name using borrowed money(assume no other income or expenses).
    If this was a regular investment the interest would be deductible, however are there any exemptions or other rules that come with the FIF regime that I am missing?
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    Quote Originally Posted by lou View Post
    Thanks Aaron,

    Do you have any FIF investments or are you coming at it from a logical perspective.
    Your investment in Foreign Investment Funds is to generate income. generally any expenses incurred as a result of that investment that are not capital in nature will be deductible such as interest on borrowings to make the investment. I am not aware of any exemptions for claiming interest in the case of FIF investments but I am not an expert in such matters so am happy to be educated if i am wrong.
    Last edited by Aaron; 14-09-2012 at 08:27 AM.

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    Quote Originally Posted by lou View Post
    This is a hypothetical question as I don't have any FIF investments yet, but planing to have them in the future.
    In terms of structure; FIF investments would be brought in my own name using borrowed money (assume no other income or expenses).
    If this was a regular investment the interest would be deductible, however are there any exemptions or other rules that come with the FIF regime that I am missing?
    If you buy FIF shares in your own name, and that is your only investment income, then you might have to be careful. Generally I would agree with Aaron.

    However, what happens if in a particular year you made a loss on your FIF investment? Under FIF rules for individuals your FIF income for that year would be nil. If that was your only investment income then then your total investment income would be nil. I guess a question would arise then if you could legitimately claim an interest rate tax deduction against zero investment income? My guess is that you could because you went into the investment with the idea of making some FIF income. And the fact that you did not does not change your original intent to earn some FIF income.

    However, I would not make such an investment decision on my guess! You would probably need to talk to an accountant who is familiar with the fine detail of such arrangements. You would probably have to minute your intentions in writing in advance to dispel any ambiguity that might catch you out in the FIF loss year situation.

    SNOOPY

    P.S. I do think the idea of structuring all of your investments with a 100% loan so that they fall under the FIF umbrella is rather unwise.
    Last edited by Snoopy; 14-09-2012 at 10:08 AM.
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    P.S. I do think the idea of structuring all of your investments with a 100% loan so that they fall under the FIF umbrella is rather unwise.
    Hi Snoopy,

    Which one do you find unwise? Only investing in FIFs or the margin loan?

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    Quote Originally Posted by lou View Post
    Which one do you find unwise? Only investing in FIFs or the margin loan?
    To try to be even handed about it, there is one potential advantage in your plan. On a bad FIF year it might be possible to claim an interest rate expense against your FIF investments even though from the IRD perspective you have made no income! I guess that would partially offset the disadvantage of having to pay tax on recovering your original capital in subsequent years.

    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.

    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 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.

    To be hypocritical I have made one FIF investment myself since FIF came in - YUM brands on the NYSE. But even that I would consider as fairly and fully priced for now. And I certainly haven't borrowed money to get into it. In general my eyes are cast firmly towards the NZX and ASX bourses these days.

    SNOOPY
    Last edited by Snoopy; 16-09-2012 at 08:05 AM.
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    Quote Originally Posted by Snoopy View Post
    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.
    SNOOPY
    Thank you for posting a rational comment on the relative disadvantage of FIF Snoopy. To many people do not understand this, in my opinion.

    Regards,

    Sauce

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