KEY POINTS:
If someone tells you today that you've just incurred a tax liability of 5 per cent of the value of your international investments, they may not be playing a practical joke on you.
April 1, 2007, was not just April Fool's Day, and also the start of the new tax year, it was also the start date for the "Fair Dividend Rate" (FDR) method for taxing certain international share investments.
Investors need to be aware of the practical implications of the new regime including the additional information that they need to obtain as currently the only records generally required to be kept are details of the dividend received.
In terms of context, the FDR method is intended to be a proxy for dividends from these foreign investments. As such investors are not taxed on actual dividends or other gains but on a deemed return of 5 per cent per annum based on the opening market value of these investments.
FDR applies to:
* International share investments where less than 10 per cent of the foreign company is owned by the investor.
* Where there is a readily available market value for the shares (for example, where the company is listed on a stock exchange).
Where there is no readily available market value there is another similar regime called the "cost method". Under this method, taxable income is generally based on 5 per cent of the investment cost (increasing by 5 per cent annually). If those investments are held on April 1 this year, an independent market valuation will be required to establish the "cost".
The major exemptions from the FDR regime include:
* Where the taxpayer's portfolio share investments (that will be subject to the FDR regime) have an aggregate cost less than $50,000.
* Where the investment is in a top 500 Australian listed company (subject to other eligibility criteria).
* Where the investment is in Guinness Peat Group.
Under FDR taxpayers will need to obtain the following information:
* The number of shares held in each foreign company.
* The share price of the foreign company at the close of trading on March 31.
* The exchange rate on that date to convert the above price into New Zealand dollars.
While the taxable income will be 5 per cent of the above calculation and taxpayers are not taxed on the dividends received, they should continue to keep track of all dividends received as any tax withheld from those dividends can still be claimed to reduce the resulting tax liability under their FDR calculations when the taxpayer ultimately files their tax return.
Another drama: if any shares are bought and then resold in the same income year, additional calculations will be required and full details held for such transactions.
But wait there's more. If the deemed 5 per cent is higher than the actual total economic return (i.e. both dividends and capital gains/losses), individuals and family trusts can calculate their income based on their actual economic return.
This could be a real option if the deemed 5 per cent income is excessive either because of a further strengthening of the New Zealand dollar or weakening in world share prices.
Share dealers applying the FDR regime must also calculate their unrealised gains as at March 2007 and pay tax accordingly.
It is not an April Fool's Day prank.
The tax rules and compliance costs for investing in foreign shares have dramatically changed.
* Mike Shaw is a senior tax partner and Robyn Walker is a tax manager at Deloitte
