Don’t let fears about tax put you off investing internationally, writes Mark Russell. Even for beginners, investing overseas is a lot easier than you think.
Initially, you want to dip your toe in the water with some modest investments. Then later, once you’re more confident, you might think about increasing the amount you invest. By then you’ll have got to know how the markets operate and the differences to investing locally in New Zealand.
But a key barrier to taking that first tentative step is having to deal with a whole new world of tax rules. You’ve heard that the tax rules for foreign shares are very complex, and that you’ll need to spend a fortune hiring an accountant to work out your taxes. Is it worth it?
The good news is that the tax rules that apply to your first international investing adventures can be kept very simple. You’ll be able to work out the tax on your own in most cases, without needing to see an accountant.
Simple tax rules if you invest less than NZ$50,000 overseas
Providing the cost (not value) of your international shares does not exceed NZ$50,000 at any time in the tax year, a straightforward set of tax rules is used. This is regardless of whether you buy shares in foreign companies, or invest in offshore funds or market index vehicles.
To calculate if you’re under this limit, you’ll need to think about any Australian investments you hold. You can disregard the cost of most listed Australian shares you own, but you can’t ignore interests in Australian funds.
If you’re under the NZ$50,000 threshold, you’ll simply be taxed at your marginal tax rate on any dividends or distributions you receive on foreign investments. And if you’re investing jointly with a spouse, then you have a combined limit of NZ$100,000. Be aware that you can’t exceed the threshold at any time in the tax year. So you’ll need to be careful that a large short-term trade does not push you over the limit, even for a few days.
The home country of the company or fund paying the distribution may deduct withholding tax from this income. Generally, that’s the only tax the home country will take. You’ll then be able to claim a credit against your New Zealand tax for that withholding tax, up to the amount of tax you have to pay in New Zealand for that income.
You’ll need to include your earnings from these investments as overseas income in your tax return. The ‘Overseas income’ portion of your tax return also contains a space to enter the amount of your corresponding tax credits.
No tax if you sell at a profit
If you make a gain when you eventually sell your shares or units, generally no tax is payable on that gain as long as you didn’t buy that investment as a short-term price speculation. But neither can you claim any losses you make.
These simple rules for offshore investments under NZ$50,000 apply only to assets you buy in your own capacity. If you invest through a trust, a different, more complex set of rules apply – regardless of how much you invest.
So, even if you are seeking to accumulate wealth in the long term in a trust, it might be worth making your first international investments in your own name. That way you don’t complicate your tax affairs until you’re ready to commit to a larger offshore investment portfolio.
The next level: different tax rules for larger investments
Once you’ve found your feet and are ready for a bigger offshore portfolio, you will need to step up to more complex tax rules. These are known as the Foreign Investment Fund (FIF) rules, and are applied both if you’re investing in your own name or through a family trust.
Under FIF rules, your taxable income each year, measured in New Zealand dollars, is usually the lower of either:
• 5 per cent of the value of your international shares on 1 April.
• the actual total return on your portfolio for the tax year, including movements in its value.
While the principle itself – taxing either the value of, or the return on, your portfolio – is straightforward, there is no question the detail of these rules is complex for investors to understand. However, if you have sound reasons for buying international shares, don’t abandon the option of a foreign portfolio just because the tax appears complicated.
The complexity of the FIF rules does come in for a lot of criticism, and the rules can throw up some apparently odd outcomes. However, my experience is that over time these more complex rules can actually result in less tax being paid than if you were taxed solely on dividends under the basic rules. Different investment platforms and online tools can also help you minimise the compliance burden and take the complexity off your plate.
So go ahead, take that first step without worrying about the tax.
The comments in this article are intended to be for general information purposes only. The comments are a high-level overview and may not mention some exceptions and variations to the rules. Investors should obtain tax advice specific to their individual circumstances.
First published 16 November, 2016
By Mark Russell
The editorial below reflects the views of the editorial contributor only and content may be out of date. This article is sourced from a previous JUNO issue. JUNO’s content comes from sources that it considers accurate, but we do not guarantee that the content is accurate. Charts are visually indicative only. JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions.