Hi there accounting fans! Here is a guide to Foreign Investment Fund (FIF) taxes for NZ tax residents.
This guide will consist of two parts, first we will look at your eligibility for FIF and second, if you are eligible we will look at how to calculate your FIF tax payable. The source document for this guide can be found at this IRD site. However it is wordy and dense. I’ve taken the most key elements and summarised it here for you. Please note that advice contained in this article is aimed at most common forms of foreign shareholding (Investments in foreign unit trusts or individual shares). If you have more complex forms of foreign shareholding, please get in touch at sam@samharith.com for more personalised tax advice.
So let’s kick it off with a simple question:
What is FIF tax?
An FIF is:
- a foreign company
- a unit trust in a foreign country
- a foreign superannuation scheme (prior to 1 April 2014)
- a FIF superannuation interest (from 1 April 2014)
- an insurer under a life insurance policy (and the policy is not offered or entered into in New Zealand).
Foreign bonds, debentures, term deposits, bank accounts and property investments held in other countries (unless you’re invested in REITs – don’t know what REITs are? don’t worry – you probably don’t own any) don’t qualify for FIF taxes. If you don’t hold any of the above, it is safe to say you can ignore FIF tax implications.
FIF tax is tax you have to pay on any income derived from your FIFs. This income then gets added to your personal tax.
Do you need to pay FIF tax?
I mean, there’s no point in reading any further if you’re not eligible right? But since you are reading this article, my guess is that you probably think you are, but you’re not quite sure.
To keep it simple, you need to determine if you have an ‘attributing interest’ in the investment.
An Attributing Interest is an investment that gives you income or benefit from the growth of the investment and any dividends received. This definition is quite broad – which means that most foreign investments are caught under FIF tax rules.
Once you’ve determined if you have an ‘Attributing Interest’ there is a three-step check to determine eligibility:
Step #1: Do you hold less than 10% interest in the investment?
This means – do you, as an individual or trust, control more than 10% of the total investment.
For example: Yanni, an NZ tax resident has investments in a small restaurant business in Indonesia. Her investments total up to 30% of the shares in the restaurant. Therefore, she is exempt from FIF taxes on that investment.
Uh wait, so if you hold more than 10% interest, you are exempt from taxes?
Not quite so – if your holding totals more than 10% of the total investment, then you may be subject to Control in a Foreign Company (CFC) tax rules (which we will discuss sometime in the future – just not now!). If this is you, then you can stop reading right now and get in touch with me.
If you hold less than 10% interest (which is usually the case if you’re invested in large foreign unit trusts or publicly listed foreign companies) you are eligible for FIF taxes.
Step #2: Do all your investments cost less than NZD 50,000?
Cost here is taken to mean the cost of initially purchasing the investment PLUS any other transactional fees incurred in buying the investment.
For example: Carsten, an NZ tax resident purchased some shares in a German Brewing Company which is publicly listed. In total he spent $40,000 plus transactional fees of $500 to acquire the investment. His cost of investment is $40,500.
In the case above, if Carsten only holds those foreign shares, then he is not subject to FIF tax on income from his foreign shares.
Remember: The $50,000 threshold applies to the cost of ALL your foreign investments. If you exceed this threshold, you are taxable on ALL your foreign investments (The first $50,000 IS NOT exempt).
To work out the cost of your investments in NZD, you can review the handy table that IRD has here (figures for 2019 – 2020 year) and convert using the appropriate rate for the date in which you acquired the investments.
If your total cost of all investments is less than NZD 50,000, you are exempt from FIF. If they exceed NZD 50,000 you are eligible for FIF tax (including the first $50,000 of investment).
Step #3: Do you hold any Australian shares/unit trust investments?
Then those shares may be exempt from FIF taxes (even if they total more than $50,000).
This DOES NOT APPLY to all Australian shares. Please use this website here to search and determine if your Australian investments are exempt from FIF.
Also, you may still have to pay taxes on dividend income received from these exempt Australian shares.
These exempt Australian investments DO NOT count towards the $50,000 threshold if you have Foreign Investments in other countries.
Is that all we need to know about FIF tax?
Well, not really. But that’s most of what you need to know regarding eligibility.
However, as I mentioned earlier, if your investments are more complex than average, you should give the policy documentation a read or get in touch with me.
If after going through those three steps, you have determined that you are eligible for FIF tax – you will need to calculate taxable income on your FIFs! We will cover this in the next article!
Until then,
Stay Positive!