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New Zealand Taxation Changes – What Do They Mean for You?
The new taxation rules are one of the biggest changes to happen to investments in the last twenty or so years. Although the reforms have been implemented with haste, taxation officials have been working on them for some time; years in fact. The implementation has been brought forward to coincide with the introduction of Kiwi Saver. It certainly has been a work in progress, with changes happening on a regular basis.
On the 12 December 2006 the Taxation (Saving and Miscellaneous Provisions) Act 2006 was passed into law.
That Act introduced two sets of new rules for offshore investments reducing the tax differential between various investment structures -now leveling the playing field.
1. The FDR (Fair Dividend Rate) regime – which commenced 1/4/2007
• International shares
2. The PIE (Portfolio Investment Entity) regime – to commence from 1/10/2007
• Australasian shares
• Marginal tax rates
The FDR rules relate to a new regime for addressing the distortions to the taxing of international shares. The PIE regime addresses distortions to taxing Australasian assets and the application of marginal rate issues.
The net effect of the two regimes is designed to neutralize the tax effect on how assets are owned, where they are located, and to ensure that individuals are taxed at their marginal rates – e.g. 19.5%
Past investment tax rules were indeed uneven. With “capital gains” taxes on pooled funds (i.e. unit trusts) but not for individual investors who were investing in the same assets, and no “capital gains” tax on property.
The only consistency was that all assets have their income taxed – interest from term deposits and bonds, dividends from shares and rent from rental properties. This is the case irrespective of how or where assets are owned or located.
So some investors have been over taxed. Of course the irony is that people taking advice and investing though professionally managed pooled funds such as unit trusts and superannuation were taxed on income and capital gains, whilst DIY investors in shares and property did not pay tax on gains, only on income. Therefore a number of people did not take qualified financial advice preferring to do their investments directly challenging the long term savings theory.
For the vast majority of investors holding overseas shares there is a new method of calculation for tax which applied from 1 April 2007. The simplest explanation is that investors will be taxed at their individual tax rate on a deemed 5% of the opening value of their overseas investments. The value in question is $50,000 which is the cost of acquiring the investment. Refer to the chart for clarification.
If you are unable to find the original share or unit price and the investment was bought before 1 January 2000, you are allowed to estimate it by using half the market value on 1 April 2007.
It is important to note that
• The $50,000 is a threshold and not an exemption. For example, if you have $51,000 the full sum is subject to the FDR rules and NOT just $1,000.
• The exemption applies only to individuals and therefore a Family Trust does not apply.
The calculations are completed in April each year. Any investments purchased after 1 April will only come into play the following April, but you should be aware that there are “quick sale” rules for those buying and selling in the same year in an attempt to avoid the $50,000 threshold.
Basically, most shares in companies outside New Zealand as well as those unit trusts and investment trusts outside New Zealand are subject to the new tax rules.
There is a special exemption for Australian listed companies on certain ASX indices, which are tax resident in Australia. The new tax rules (FDR) should apply to most Australian units trusts and many Australian companies because these are not listed on the stock exchange and therefore do not qualify for the exemption. Other Australian companies fail the test because they might be listed on the exchange, but are not tax resident in Australia. As a guide those listed on ASX 500 would generally be exempt.
There are a limited number of other companies and schemes that are exempt, such as GPG (for 5 years), NZIT (optional for 2 years), some employee share schemes (for a limited period), and some Australian unit trusts, superannuation schemes and some offshore venture capital companies.
In the past, a rule of $50,000 (referred to as the ‘de minimus’ rule) mainly applied to ‘Foreign Investment Funds’ (FIFs) outside the grey list countries (Australia, Canada, Germany, Japan, Norway, UK, USA and Spain). It now applies across a much wider range of offshore investments. The Government has replaced the old FIF rules and grey-list rules with the new Fair Dividend Rate rules.
PIE CHANGES
Flow Chart
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