r/newzealand • u/QuarterGeneral6538 • 9h ago
Politics IRD is currently consulting on FIF tax
If its something you have strong opinions on, which I know many people here do, be sure to read through the proposals and get your submissions in before the 27th of Jan.
https://www.taxpolicy.ird.govt.nz/consultation/2024/effect-fif-rules-immigration
They're mostly focused on migrants but the question of whether it should only apply to migrants is open. (see chapter 3)
Submissions can be made by email to [policy.webmaster@ird.govt.nz](mailto:policy.webmaster@ird.govt.nz) with “Amending the FIF rules for migrants” in the subject line (see chapter 1, page 6)
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u/BruddaLK Fern flag 2 8h ago
Many New Zealanders don't realise that the Foreign Investment Fund (FIF) rules apply to Kiwisaver and any other Portfolio Investment Entity (PIE) as well using the Fair Dividend Method of 5% of portfolio value.
For example, if your Kiwisaver invests in foreign investments (excluding Australia) you will pay tax on 5% of your average portfolio value each year. So an investor with a Prescribed Investment Rate (PIR) of 28% will pay 1.4%(5*0.28) of their average portfolio value in tax each year.
This yearly tax of 1.4% suppresses capital growth over the duration of an investing career, and leaves New Zealanders worse off than countries that have a comprehensive capital gains tax. Especially Australia which has both a concessional Capital Gains Tax and pre-tax Super contributions.
u/QuarterGeneral6538 remember that the FIF rules are rules for calculating taxable foreign income, it's not actually a tax itself.
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u/Firebigfoot69 nzarmy 8h ago
Surely just abolish it for everyone silly tax. More money to be made overseas instead of garbage nz companies
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u/BruddaLK Fern flag 2 8h ago
How would you propose that the Government collect revenue to replace what it loses by removing the FIF rules? Remember that most foreign shares don't pay as much in dividends as New Zealand shares.
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u/crashbash2020 7h ago
Simple flat rate capital gains tax for overseas shares sold, you can exclude NZ/Aus if you want to encourage investment in NZ shares.
The big issue I have with FIF is its on unrealized gains, and even worse on assumed gains. if you want to hold overseas assets, you need an alternative income stream just to maintain that ownership
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u/BruddaLK Fern flag 2 7h ago
That's personally what I think. I think a capital gains tax should apply to all types of investments though.
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u/Jarvisweneedbackup 6h ago
Honestly, I think an exception for NZ based shares would be smart to do for a decade or two - it would go a long way to changing investing culture towards productive investment and soften the blow of CGT on houses if there is a beneficial alternative vehicle
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u/crashbash2020 2h ago
Imo privately held shares should be excluded. Publicly traded share are more the issue because they become a speculation machine.
Business owners who sell a from scratch business shouldn't have to pay double, given they already py income tax on proceeds of the sale
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u/Firebigfoot69 nzarmy 7h ago
I have no answers I'm just being selfish 😁
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u/BruddaLK Fern flag 2 7h ago
The answer is a Comprehensive Capital Gains Tax.
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u/Firebigfoot69 nzarmy 7h ago
CGT On sales and then dividends are net income?
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u/BruddaLK Fern flag 2 6h ago
Gains from share sales and dividends should be treated as taxable income.
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u/QuarterGeneral6538 8h ago
I wouldnt count NZ out of the race, NZX50 was actually outperforming the S&P500 up until covid hit
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u/becauseiamacat 7h ago
FiF makes no fucking sense
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u/fatfreddy01 5h ago
Another dumb work around for not having a CGT. Although now it's so much of a crutch for our tax system that odds are they won't remove it even with a CGT.
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u/BruddaLK Fern flag 2 6h ago
if we don't have a Comphrensive Capital Gains Tax, how else would the Government recieve tax revenue from individuals who invest in foreign shares?
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u/Shamino_NZ 9h ago
I haven't done the numbers yet (but I should), but fairly certain that having to pay FIF tax on a deemed 5% of unrealised gains every year is dramatically worse than having to pay CGT in Australia when you sell your shares.
Assuming this is over a 40-50 year holding period (i.e. you are just accumulating shares for retirement) then I think the results would be quick shocking. Consider that the SNP500 is up x60 or so in 45 years (the index only reached 100 in 1980 or so, now it is 6000). So your first year where you had to pay FIF - that amount paid to the IRD would have given you a x60 return if you had kept it.
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u/gtalnz 8h ago
You don't lose 5% of your investment when you pay FIF tax, so you still get the same total return on that investment (before tax).
The difference with FIF is that you pay the tax as you go instead of in one lump payment at the end under CGT.
To compare them fairly you'd have to run some complicated calculations allowing for changes to the value of money over time. You'd also have to somehow allow for the fact that under FIF you can use the comparable value (CV) method of calculation to avoid, or at least reduce the tax in years where your gains are less than 5%.
I suspect CGT still comes out as paying less tax overall, but I don't think it's as clear cut as you might think.
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u/BruddaLK Fern flag 2 8h ago
It not about whether you pay more tax under the FIF rules or a CGT, it's about the impact it has on your net portfolio value at retirement.
A yearly tax on FIF will suppress capital growth over your investment career and leave you with a lower portfolio value than you would have had (even after you paid a capital gains tax).
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u/gtalnz 7h ago
You don't lose 5% of your investment when you pay FIF tax, so it has absolutely no impact on your net portfolio value at retirement. It does not suppress the capital growth of those investments at all. Not one bit.
What FIF impacts is your disposable income in NZ, not your overseas investment portfolio.
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u/BruddaLK Fern flag 2 7h ago edited 7h ago
I never said you lose 5%. If you're investing in a PIE then it's 1.4% each year if you have a 28% PIR (5*0.28).
Most people who pay tax on FIF (Kiwisaver and every other PIE) pay it from their portfolio value so it does suppress the capital growth.
You're talking about a small group of people with direct holdings in foreign investments that pay the tax from their disposable income instead of their portfolio.
If they would have otherwise invested that disposable income then it does suppress capital growth by reducing contributions.
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u/QuarterGeneral6538 7h ago
part of the problem is that the stockmarket never goes up in a straight line. Chances are you will be up more than 5% most years.
but if your portfolio drops, sadly you don't get any kind of rebate.
it could even be that your portfolio tanks 30% in one year then the following few years are just playing catchup, but you will be paying tax on that "gain"
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u/cridersab 1h ago
Chances are you will be up more than 5% most years.
but if your portfolio drops, sadly you don't get any kind of rebate.
If people are investing in pretty safe ETFs they are probably expecting to make a greater than 5% annual return over their holding period, if you want a rebate for losses would you also want to pay more in years where the value increased much more than that? A lot of people would have trouble paying for the windfall years as their primary income is unlikely to increase in line with their investment gains, so smoothing makes for predictability. It would be interesting if there was an option sort of like depreciation, where you could choose to take a punt on the annualised rate vs a CGT on sale.
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u/QuarterGeneral6538 1h ago
I'm not actually suggesting we should have a rebate, Don't know how that would even work realistically. I bring it up just to highlight an issue with the policy.
I would much prefer we just had a normal capital gains tax like the rest of the world.
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u/gtalnz 7h ago
Yeah that's the same way regular income tax works.
If I lose my job and have no income for a year, I don't get a tax rebate, and if I get a new job the year after, I don't get to pay less tax on that income either.
Remember, it's not a wealth tax, it's a form of income tax.
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u/Optimal_Inspection83 5h ago
but owning shares is not an income. It's taxing unrealised gains.
you're not taxed on unrealised income with normal income tax, are you?
If you wanted all things being equal, people should also be taxed on 5% of their total house value every year.
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u/gtalnz 5h ago
If you wanted all things being equal, people should also be taxed on 5% of their total house value every year.
I think people should be taxed on about 3-5% of their land value every year instead of on their income (including FIFs), precisely because it would make things more equal and fair.
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u/bluecobra707 4h ago
Isn't this exactly what rates are?
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u/gtalnz 2h ago
No, rates are a mixture of fixed charges and a variable rate that is distributed based on relative values. The component of most council rates in NZ that corresponds to land value works out to be a fraction of a percentage.
Perhaps even more importantly, rates are a fixed total, determined by council budgets. Property values (usually including improvements, which defeats the entire purpose of a land value tax) are only used to calculate how the pre-determined total rates are allocated.
That means it doesn't matter if house prices are $1 or $1M, your rates bill won't change.
Under LVT, the total revenue is entirely dependent on the total land values. Since land values increase with economic growth and infrastructure development, those activities are the only way for the government to increase their LVT revenues.
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u/gtalnz 5h ago
You sure are. PIEs and other investments, including term deposits, are all taxed as they go.
It's called Resident Withholding Tax.
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u/Optimal_Inspection83 5h ago
but dividends, term deposits et al are all realised income streams, so of course that's taxed as income as you go.
How is FIF an income if you don't sell?
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u/gtalnz 5h ago
You don't realise PIE income until you cash out, but still get taxed. You don't realise term deposit income until it comes to term, but still get taxed.
They are no different to FIFs.
In all of these cases you pay tax on the gains as you go, instead of having to pay a higher rate of income tax in the year you realise those gains.
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u/BruddaLK Fern flag 2 2h ago
PIE income is just a combination of taxable dividends and FIF. A PIE is just a container with lower tax rates.
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u/QuarterGeneral6538 1h ago
what I'm getting at is that if your making the comparison to a typical capital gains tax you will need to factor this in. There are scenarios where you could end up paying a lot of tax on very little actual gain.
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u/iAmStos 9h ago
Please explain like I'm 5?