Foreign Investments Funds (FIF)
I have written about the taxation of these type of funds before but in the last couple of years I have come across several people who are unaware of how these type of investments are taxed and it comes as a surprise that they have to pay tax on the unrealised gains as these investments go up in value.
Most people think that they only pay tax on any dividends, interest or other monies actually received.
So what is an FIF ? These are offshore or foreign investments in a company, unit trust, superannuation scheme and life insurance policy.
I will concentrate on shares in foreign companies. There are some exemptions but if they do not apply then where the cost of the shares is greater than $50,000 NZD then income is deemed to have been earned using one of five different calculation models.
For shares the main calculation methods are known as the Fair Dividend Rate ( FDR) and the Comparative Value (CV) .
The FDR method deems 5% of the market value of the shares to be income. This is effectively a tax on a persons wealth.
The CV method calculates income by comparing the market values at the start and end of the financial year and calculates an unrealised capital gain.
Clients universally dislike being caught by the FIF regime as in a lot of cases they have not received any income to pay the tax on the deemed income.
The $50,000 threshold is not very high for someone who is managing their own retirement savings and probably started building a retirement nest egg before Kiwisaver came into law. I do not think the threshold has ever been adjusted for inflation.
If a foreign or overseas investment is caught by the FIF rules then any dividends, interest or other monies actually received are not taxable.
You should contact your chartered accountant or financial advisor before making a financial commitment.