Foreign Investment Tax Confusing

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Forums › Finance and wealth management › Foreign Investment Tax Confusing

Entity

5 posts

Wannabe Geek

#204816 18-Oct-2016 19:58

Hi,

I have been trying to understand how the tax system works for shares bought offshore i.e. Apple, Google, Tesla etc.

I have investments >$60k and after reading through some IRD material it seems as if I get taxed at 5% of capital realised / unrealised regardless of past performance.

Scenario (Keeping it simple, no dividends etc.):

Year 1 portfolio worth $60,000

Year 2 portfolio worth $70,000

Year 3 portfolio worth $50,000

Year 4 portfolio worth $60,000

Year 6 portfolio worth $80,000

Do I have to pay 5% every year or only years I make a profit? If the latter then do i pay tax in year 4?

Hope this makes sense,

Thanks for the help

hmacinn

3 posts

Wannabe Geek

#1653477 19-Oct-2016 12:39

As an individual or trust holding FIF investments, each year you have a choice between calculating FIF income by the Comparative Value (CV) or Fair Dividend Rate (FDR) methods. Companies and managed funds don't have this choice and must use FDR. There are some other calculation methods for less common cases.

Income calculated by FDR is 5% of the opening value of the portfolio. Income under CV is basically capital gains plus dividends, but can't be negative.

I've assumed the portfolio balances you provided were start of year values.

Under your example in Year 1, the CV income is $10k and the FDR income is $3k, so you'd choose FDR and pay tax on $3,000.

In Year 2, the CV income is 0 (a loss of $20k, but can't be negative), and the FDR income is $3,500, so you'd have $0 FIF income.

In Year 3, the CV income is $10k and the FDR income is $2,500, so you'd pay tax on $2,500 FIF income. Yes, even though your portfolio has only just gotten back to the original balance of $60,000 you still have to pay tax in Year 3.

In Year 4, the CV income is $20k and the FDR income is $3k, so you'd pay tax on $3,000 of FIF income.

In summary, you pay tax on the actual gain in any year your portfolio performance is between 0 and 5% (using the CV income calculation method). If your portfolio does better than 5% for the year, you use the FDR method and are taxed as if your gain was just 5%. If your portfolio has a loss, you pay no tax but you also have no loss to offset against other income or carry forward.

Don't take this as a complete guide as there may be other factors e.g. Quick Sale Adjustments (in cases where you use FDR and buy and sell a holding during a year), foreign tax credits (for foreign taxes withheld from dividends but not in Year 2 where there was no FIF income) and brokerage fee deductions to take into account.

antoniosk

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#1654540 19-Oct-2016 15:49

hmacinn:

As an individual or trust holding FIF investments, each year you have a choice between calculating FIF income by the Comparative Value (CV) or Fair Dividend Rate (FDR) methods. Companies and managed funds don't have this choice and must use FDR. There are some other calculation methods for less common cases.

Income calculated by FDR is 5% of the opening value of the portfolio. Income under CV is basically capital gains plus dividends, but can't be negative.

I've assumed the portfolio balances you provided were start of year values.

Under your example in Year 1, the CV income is $10k and the FDR income is $3k, so you'd choose FDR and pay tax on $3,000.

In Year 2, the CV income is 0 (a loss of $20k, but can't be negative), and the FDR income is $3,500, so you'd have $0 FIF income.

In Year 3, the CV income is $10k and the FDR income is $2,500, so you'd pay tax on $2,500 FIF income. Yes, even though your portfolio has only just gotten back to the original balance of $60,000 you still have to pay tax in Year 3.

In Year 4, the CV income is $20k and the FDR income is $3k, so you'd pay tax on $3,000 of FIF income.

In summary, you pay tax on the actual gain in any year your portfolio performance is between 0 and 5% (using the CV income calculation method). If your portfolio does better than 5% for the year, you use the FDR method and are taxed as if your gain was just 5%. If your portfolio has a loss, you pay no tax but you also have no loss to offset against other income or carry forward.

Don't take this as a complete guide as there may be other factors e.g. Quick Sale Adjustments (in cases where you use FDR and buy and sell a holding during a year), foreign tax credits (for foreign taxes withheld from dividends but not in Year 2 where there was no FIF income) and brokerage fee deductions to take into account.

I'd love to know how this compares with other places like USA/Aus/UK.

________

Antoniosk

SumnerBoy

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#1654543 19-Oct-2016 15:50

I thought we didn't have to pay anything for selling shares (overseas or local), since there is no CGT.

afe66

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#1654559 19-Oct-2016 16:26

I gave up trying to work out how to buy shares do went for nzx smart shares. Depending on which one you look at, Google, Facebook Apple Amazon were in the top 10 companies in the index.

A.

Geektastic

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#1654570 19-Oct-2016 17:01

antoniosk:

hmacinn:

As an individual or trust holding FIF investments, each year you have a choice between calculating FIF income by the Comparative Value (CV) or Fair Dividend Rate (FDR) methods. Companies and managed funds don't have this choice and must use FDR. There are some other calculation methods for less common cases.

Income calculated by FDR is 5% of the opening value of the portfolio. Income under CV is basically capital gains plus dividends, but can't be negative.

I've assumed the portfolio balances you provided were start of year values.

Under your example in Year 1, the CV income is $10k and the FDR income is $3k, so you'd choose FDR and pay tax on $3,000.

In Year 2, the CV income is 0 (a loss of $20k, but can't be negative), and the FDR income is $3,500, so you'd have $0 FIF income.

In Year 3, the CV income is $10k and the FDR income is $2,500, so you'd pay tax on $2,500 FIF income. Yes, even though your portfolio has only just gotten back to the original balance of $60,000 you still have to pay tax in Year 3.

In Year 4, the CV income is $20k and the FDR income is $3k, so you'd pay tax on $3,000 of FIF income.

In summary, you pay tax on the actual gain in any year your portfolio performance is between 0 and 5% (using the CV income calculation method). If your portfolio does better than 5% for the year, you use the FDR method and are taxed as if your gain was just 5%. If your portfolio has a loss, you pay no tax but you also have no loss to offset against other income or carry forward.

Don't take this as a complete guide as there may be other factors e.g. Quick Sale Adjustments (in cases where you use FDR and buy and sell a holding during a year), foreign tax credits (for foreign taxes withheld from dividends but not in Year 2 where there was no FIF income) and brokerage fee deductions to take into account.

I'd love to know how this compares with other places like USA/Aus/UK.

I'm not sure; I suspect many people in the UK would use an ISA (Individual Savings Account) for this sort of thing. Here's the Wikipedia definition for ease

"An Individual Savings Account (ISA; /ˈaɪsə/) is a class of retail investment arrangements available to residents of the United Kingdom. It qualifies for a favourable tax status. Payments into the account are made from after-tax income. The account is exempt from income tax and capital gains tax on the investment returns, and no tax is payable on money withdrawn from the scheme either. Cash and a broad range of investments can be held within the arrangement, and there is no restriction on when or how much money can be withdrawn. Funds cannot be used as security for a loan.[1] It is not a pension product, but can be a useful tool for retirement planning.[2][3]"

Stock market shares and cash are amongst the 'broad range' of investments allowed: there are a number of reported instances of people having ISA's that have topped a million quid tax free.

Sidestep

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#1654586 19-Oct-2016 17:57

In Canada you'd hold them in an RRSP, RESP or a Tax Free Savings Account.

Wikipedia:

"The Tax-Free Savings Account (TFSA) is an account that provides tax benefits for saving in Canada. Investment income, including capital gains and dividends, earned in a TFSA is not taxed, even when withdrawn.
Contributions to a TFSA are not deductible for income tax purposes, unlike contributions to a Registered Retirement Savings Plan (RRSP).
Despite the name, a TFSA does not have to be a cash savings account. Like an RRSP, a TFSA may contain cash and/or other investments such as mutual funds, certain stocks, bonds, or Guaranteed Investment Certificates (GICs)"

Kyanar

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#1654718 19-Oct-2016 20:52

SumnerBoy:

I thought we didn't have to pay anything for selling shares (overseas or local), since there is no CGT.

This isn't for selling them, merely for holding them. You're taxed on the movement in value as if it was income.

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Geektastic

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#1654757 19-Oct-2016 21:39

Kyanar:

SumnerBoy:

I thought we didn't have to pay anything for selling shares (overseas or local), since there is no CGT.

This isn't for selling them, merely for holding them. You're taxed on the movement in value as if it was income.

Possibly the most ridiculous form of taxation I have ever heard of. Why should you pay tax on money you have not yet got?!

mattwnz

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#1654775 19-Oct-2016 21:48

Sounds like it is some form of investment fund rather than just shares?

Entity

5 posts

Wannabe Geek

#1654825 19-Oct-2016 23:21

This is pretty confusing compared to what I am used to. Appreciate the feedback.

Does the tax that I have to pay on the capital gain get added to my PAYE income and I get taxed at my marginal tax rate on all income?

e.g.

Using the FDR 5% after 33% PAYE tax = 3.35%

So I only technically pay 3.35% "Capital Gains Tax"?

So one can actually lose money by paying tax holding onto a stock that is not performing well? Doesn't seem fair.

mattwnz

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Uber Geek

#1654846 20-Oct-2016 00:30

I would suggest getting an account to do it for you. Probably not worth the hassle doing it yourself, and percentage wise based on your large investments, the cost would be quite a small percentage.

hmacinn

3 posts

Wannabe Geek

#1654941 20-Oct-2016 10:11

Entity:

Does the tax that I have to pay on the capital gain get added to my PAYE income and I get taxed at my marginal tax rate on all income?

e.g.

Using the FDR 5% after 33% PAYE tax = 3.35%

So I only technically pay 3.35% "Capital Gains Tax"?

So one can actually lose money by paying tax holding onto a stock that is not performing well? Doesn't seem fair.

I'm not sure where your 3.35% figure above comes from.

The 5% FDR method is how you calculate the deemed INCOME from your foreign share portfolio. This deemed income is then added to your other income and tax is calculated on the total using the normal rates. I wouldn't call it a pure "Capital Gains Tax" because dividends are not taxed separately on top and some of that income likely comes from dividends. The rest of the deemed income comes from realised and/or unrealised capital gains. Unlike NZ shares, there is no distinguishing whether the shares are held for "trading" or "revenue".

Say I hold a portfolio of shares that meet the definition of a FIF and at the start of year was worth $60k. It went up to $66k (a 10% gain) during the year, so I elect to calculate income using the FDR rather than CV method.

$60k * 5% = $3,000 income from the FIF holdings to report on tax form.

The $3,000 gets added to other income and the tax is calculated on the total. Assuming you are in the top 33% marginal rate bracket, the additional tax to pay for your FIF holdings' income is:

$3,000 * 33% marginal tax rate = $990

Entity

5 posts

Wannabe Geek

#1655389 20-Oct-2016 21:56

hmacinn:

Entity:

Does the tax that I have to pay on the capital gain get added to my PAYE income and I get taxed at my marginal tax rate on all income?

e.g.

Using the FDR 5% after 33% PAYE tax = 3.35%

So I only technically pay 3.35% "Capital Gains Tax"?

So one can actually lose money by paying tax holding onto a stock that is not performing well? Doesn't seem fair.

I'm not sure where your 3.35% figure above comes from.

The 5% FDR method is how you calculate the deemed INCOME from your foreign share portfolio. This deemed income is then added to your other income and tax is calculated on the total using the normal rates. I wouldn't call it a pure "Capital Gains Tax" because dividends are not taxed separately on top and some of that income likely comes from dividends. The rest of the deemed income comes from realised and/or unrealised capital gains. Unlike NZ shares, there is no distinguishing whether the shares are held for "trading" or "revenue".

eg

Say I hold a portfolio of shares that meet the definition of a FIF and at the start of year was worth $60k. It went up to $66k (a 10% gain) during the year, so I elect to calculate income using the FDR rather than CV method.

$60k * 5% = $3,000 income from the FIF holdings to report on tax form.

The $3,000 gets added to other income and the tax is calculated on the total. Assuming you are in the top 33% marginal rate bracket, the additional tax to pay for your FIF holdings' income is:

$3,000 * 33% marginal tax rate = $990

Thank you very much! That makes perfect sense. Now I can carry on investing overseas (seems to make more sense then investing locally, less tax) with peace of mind. Will more then likely need an accountant with any quick sale adjustments and dividends being calculated.