Aware of tax issues for owning foreign shares? Foreign Investment Fund?

Many migrants aren't aware of the tax issues when holding onto foreign shares after becoming a NZ tax resident. If they are a transitional resident, they have a 4-year window to decide whether they should continue to hold on their foreign shares. Essentially, it’s a cost vs benefit analysis and the taxpayer’s circumstance need to be considered to determine this as each taxpayer’s situation is unique.

Since the introduction of the Common Reporting Standard (CRS) from 1 July 2017, we’ve seen an increase in IRD risk review cases where the taxpayer omitted to return foreign investment fund (FIF) income on the foreign shares. The implementation of CRS enabled countries to exchange tax information of taxpayers so transparency of taxpayer’s information between countries is greater than ever before!

NZ locals should also be wary of the FIF rules as it may apply to investment in foreign shares. Understanding the tax issues involved help taxpayers understand their tax risk exposures and make informed investment decisions.

In this video, Connie Lui summarises the FIF regime and the step plan to approach a FIF scenario.

If you need further assistance with tax, accounting or property matters, we offer a FREE 30-minute consultation. You can book at https://www.nztaxprop.co.nz/bookings-checkout/free-30min-consultation.




Below is a summary of the discussion points.

  • Firstly, we need to determine whether the offshore investment falls under the FIF rules or controlled foreign company (CFC) rules. This depends on the shareholding interest in the offshore investment. NZ tax residents hold interest of

  • less than 10% (whether CFC or not) – FIF rules applies;

  • between 10% to 50% (not CFC) – FIF rules applies;

  • 10% or more in a CFC – CFC rules applies.

  • There are 3 steps to apply in a FIF scenario.

  1. Do I have a FIF?

  2. Does an exemption apply?

  3. Choose and apply FIF method


STEP 1) DO I HAVE A FIF?


  • FIF applies to NZ tax residents who hold interests in an attributing FIF which is not exempt.

  • The main category of FIF interest comprises shares in a foreign company, although similarly classified is an interest in a foreign superannuation scheme and foreign life insurance policy.

  • From 1 April 2014, in general, an interest in a foreign superannuation scheme is no longer an attributing interest subject to the FIF rules. Taxation applies to distributions when received. However, an interest in a foreign superannuation scheme is still subject to FIF rules where either the person had applied the FIF rules to the interest in a return filed before 20 May 2013 & continue to apply those rules or interest was acquired when the person was resident in NZ.

  • Transitional residents do not need to comply with FIF rules so they have 4 years to do some tax planning if needed.

STEP 2) DO ANY EXEMPTIONS APPLY?


  • Some common FIF exemptions are set out below:

  • For natural person, there is de minimis threshold of NZD50,000 which means if you have foreign shares that cost less than NZD50,000 you may be eligible for exemption from the FIF rules. However, dividend received still needs to be taxed upon receipt.

  • Certain Australian resident listed companies are exempt from FIF rules. This exemption is restricted to companies listed on approved index of the Australia Stock Exchange. There are other criteria before the exemption applies so taxpayer’s circumstances shall be reviewed to determine whether this exemption would apply.

  • Employee share purchase scheme of grey list company (e.g. companies in Australia, UK, US, etc) may be exempt from FIF rules. Similarly, there are other criteria before the exemption applies so taxpayer’s circumstances shall be reviewed to determine whether this exemption would apply.


STEP 3) CHOSE METHOD FOR CALCULATION


5 Methods

  • Fair Dividend Rate method – 5% x OMV + Quick sale adjustment

  • Cost method – 5% x OCV + Quick sale adjustment

  • Comparative value method – CMV + Gains – OMV + Costs

  • Deemed rate of return method – Only be used for non-ordinary shares if comparative value method is not practical

  • Attributable FIF income method – Net attributable FIF income x income interest

Full disclaimer: The information presented in this webinar is intended to be broad and educational in nature, and should not be interpreted as financial or other advice. Individuals should make their own enquiries and seek their own advice tailored to their personal circumstances and goals. The materials shared in this webinar are provided by the presenters as a service to the registered attendees on an "as-is, as-available" basis for informational purposes only. The presenters assume no responsibility for any errors or omissions in these materials. The presenters make no commitment to update the information contained herein. All company names and logos and all related trademarks, tradenames, and other intellectual property are the property of the presenters and cannot be used without prior written permission.

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