The Taxation (Savings, Investment and Miscellaneous Provisions) Act 2006 (“The Amendment Act”).
Please note this is a very general overview applied to a very complex piece of legislation. Do not rely on this article and contact us directly if you think this affects you.
As of 1 April 2007 the Government introduced new rules for the taxation of shares held in foreign companies. This includes units owned in unit trusts, foreign superannuation schemes and life insurance policies.
Generally speaking, under the old rules if you held shares in foreign, grey list countries (ie; countries with similar taxation structures as ours) as a share investor, you were required to return the dividend income on those shares. Under the new rules, unless your foreign portfolio has a cost of less than $50,000, or is held in Australia on the ASX, it is likely you will fall under the new offshore investment calculations. If your portfolio is held in a company or Foreign Trust then the under $50,000 exemption won't apply.
Whilst there will now be six methods to calculating this type of income it is the “fair dividend rate’ (FDR) method that is the most likely to apply.
Broadly speaking, the FDR method (the default method) taxes 5% of the market value of the foreign share portfolio at the start of the year. However this is further complicated by also calculating income if shares are bought and sold in the income year. Note that in this case you no longer return dividend income and if the return is less than 5% you can return the lesser amount (unless you are a company). If the value is in a loss position it is returned as nil.
There are exemptions, the main ones being:
- if the shares are in companies resident in Australia and are listed on the Australian Stock Exchange
- Australian Superannuation Funds
- certain Australian Unit Trusts
- Employee Share schemes
- so called “GPG” exemption which broadly speaking is a grey list company listed on the NZX with a significant number of New Zealand shareholders.
- taxpayers interest is greater than 10% of the foreign company or five or fewer NZ residents have a greater than 50% interest
- the di minimus exemption where the individual taxpayers attributing interests in all foreign shares (those not otherwise exempt as above) cost $50,000 or less
- Transitional Resident Exemption 4 years if you have immigrated to New Zealand.
Where foreign shares are not subject to the offshore share investment rules, individual investors will continue to be taxed on dividends when received. Gains on sale will continue to be taxed only if the investor is deemed to have a dominant purpose in trading shares.
Also added was the PIE. (Portfolio Investment Entities) regime .
These rules generally apply to funds managed in NZ of which a unit portion is held by a taxpayer. They came into effect 1 October 2007. The purpose of these rules was to better align the tax treatment of Individuals who invest through managed funds with those who made direct investments.
Prior to the regime direct investors generally only paid tax on dividend (and not realised capital gains) and paid tax on this investment income at their personal rates (which may be lower than 33%)
On the other hand, indirect investors, through the funds were taxed at 33% on both realised Capital Gains and their dividends. With the introduction of Kiwisaver this method of taxing (in terms of NZ’s total tax take) would have increased.
Under the new rules there are two main types of PIEs.
The tax treatment differs between the two.
For a listed PIE the tax is paid at a flat rate of 30% and distributions or dividends are excluded income for natural persons and family trusts. For all other investors, excluded income to the extent that the distribution exceeds fully imputed distributions.
Unlisted PIEs (PTREs) (or multi-rate PIEs) pay tax on behalf of the investor who advises of their individual prescribed investor rate (PIR) If the investor advises the correct rate (ie in line with their top rate of tax) then this income is also excluded from their tax return. Note the top PIE rate is 30% so there will be a tax advantage if the investor’s top rate is 39%. Obviously this type of investment allows an individual to elect at 19.5% or 0% also.
COMMONLY ASKED QUESTIONS AND ANSWERS
Q If my foreign shares have a cost of $51,000, will I include all of those shares in my tax return, or $1,000 under the new rules?
A $51,000. You will return 5% of the market value of those shares at the beginning of the income year or their actual increase in value (including dividend payments) if less.
Q If my international portfolio has a cost of $70,000, and includes $30,000 of Australia resident shares, do I fall under the new FDR calculation?
A No. You will just return the dividend income, as the $50,000 threshold is on non-Australasian shares
Q Does a married couple qualify for a total $100,000 exemption at purchase price, or do the shares have to be held specifically 50/50 in each individual name?
A Half the shares would need to be held in each spouse’s name, or jointly owned, ie; a 70/30 split would not exempt the $70,000 portfolio. Also note the exemption does not generally apply to trusts and estates.
Q I purchased my shares over ten years ago and have no record of their cost.
A You have the option of valuing any shares (for the purpose of calculating their cost) that were purchased pre-1 April 2000 at half their market value at 1 April 2007 for the purpose of the $50,000 threshold.
Q I have shares in companies that are not easily identifiable as Australian resident. For example, some are dual listed in Australia and the UK. How do I determine their residency?
A The IRDs’ response is that if the company is listed on the Australian Stock Exchange and its dividends carry Australian franking credits then this should provide certainty that the company is resident in Australia.
Q Do I still get a credit for the foreign tax paid on my dividends if I am caught under the new rules?
Q In calculating the $50,000 threshold how do I calculate the cost of shares that I received as part of an employee incentive scheme, ie; at no cost to me?
A Use the shares market value at the time you received them under your employee incentive scheme.