FIF Income in New Zealand: A Plain-English Tax Guide for Investors

If you've bought over $50k of overseas shares, either directly or through a fund, you're probably liable for FIF tax. Here's what that means, what IRD looks for, and how to stay compliant.

What Is FIF Income?

FIF stands for Foreign Investment Fund. It's a tax regime used by Inland Revenue to capture income from overseas investments held by NZ tax residents. You may be subject to FIF tax if you've brought more than $50k NZD of:

• Overseas stocks/shares like Apple, Alphabet, Microsoft, etc
• Managed funds with offshore exposure like Forsyth Barr, Craigs, Jarden, etc
• ETFs and Index Funds like Vanguard International Shares Select, iShares, etc.

Why does it exist?

If you own your own business, and the business makes a profit, then the business will pay tax. For the business to get that after tax profit to you, the shareholder, the company needs to declare a dividend. The dividend is taxable income in your name.

So you might be thinking, hold on, the company paid tax on this profit, why do I have to pay tax on it in my name too? Doesn't that mean the same income is taxed twice?

New Zealand has an imputation credit system, meaning if a company pays tax, it can attached credits to the dividend, so the shareholder doesn't get taxed a second time.

However, not all countries have an imputation credit system, most notably, the USA doesn't.

So, the shareholders of these overseas companies don't want to have to pay tax on income that's already been taxed on without having any tax credits to show for it, so signals to management that they should do things like invest in buying out other small companies, or doing stock/share buybacks.

Doing those things increases the value of the shares, allowing the investor to still get a return, but without having the taxing event of a dividend.

So, New Zealand investors could buy shares in overseas companies that never declare a dividend, and they'd never have any taxable income, so would never have to pay tax.

The FIF rules came in and said we don't want all of our money being invested overseas, so lets even up the playing field and assume that you would've earned a dividend at a 5% rate of the value of the company (which is the FDR, fair dividend rate method), or you can return the actual gain on the change in value in shares + dividends (CV or comparative value method).

Why Does This Matter?

Most investors are surprised to learn that:

• FDR method doesn't care about actual dividends paid, you pay tax based on the opening market value
• There are tax credits you can claim, regardless of what method you use.
• The $50k threshold is only for individuals, so Trusts and Companies with any FIF exposed investments are liable from the first dollar invested.
• The $50k threshold is on how much it cost to buy, not the market value. So if you buy $49,999.99 NZD of google shares, and nothing else, then you're not liable for FIF, no matter how high they go.
• Reinvested dividends count as adding to the cost, so be careful if you're trying to stay under the $50k threshold and are on a dividend reinvestment programme.
• FIF rules trump the trader rules, so even if you're actively buying and selling overseas shares trying to buy low and sell high for a profit, the FIF rules are the ones that govern how much tax you pay.
• Sometimes PIEs are more tax efficient, sometimes they're not.
• There is significant tax planning opportunities around investment purchasing and structuring.
• Inland Revenue is actively auditing FIF & crypto investors.
• Failure to disclose FIF income is considered non-compliance and could trigger penalties or reassessments.

If you are using the FDR method, you're not paying tax on 5% of the investment value, you're deemend to have received a 5% 'dividend' on the market value of the investment. You then pay tax on the deemed income. So, if you have $100k of google shares, your 'dividend' income is $5k and you pay tax on the $5k at your tax rate.

Investment examples where FIF probably applies

• US shares via a brokers like IBKR, ASB, or Sharesies
• Managed Funds with investments in Overseas companies from Craigs, Forsyth Barr, or Jarden
• Index Funds like Vanguard, or S&P500 via InvestNow, Simplicity, or Kernel

Investment Examples where FIF doesn't apply

• ASX-Listed companies on IRD's exempt list
• NZ PIE Funds with International Shares
• Overseas Bonds, Notes, or Term Deposits

How Is FIF Income Calculated?

If your offshore investments cost more than NZD $50,000 for an individual ($100,000 for a joint holding), you must calculate your taxable FIF income. There are two main methods, and you can switch between them from year to year, but you must be consistent in using the same method for all your investments in a given year - you can't cherry pick one method for some investments and another method for others:

1. Fair Dividend Rate (FDR)

You are taxed on 5% of the opening market value of your offshore investments.

2. Comparative Value (CV)

You pay tax on the actual increase in value plus dividends. Losses are reduced to $nil, and are not carried forward.

When should I bite the bullet and decide to choose investments subject to FIF vs say a PIE fund, bonds, or NZ companies?

There's no correct answer here. From a pure numbers point of view, investing is about risk adjusted after tax returns, so people with different portfolios, risk appetite and tax circumstances will land on different answers.

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