Sharesies calls for ‘FIF’ tax tweaks to benefit locals with offshore investments, not just wealthy foreigners

Call for the Government to lift the $50,000 FIF tax threshold, which hasn't been changed in more than two decades. Photo / NZME

There are calls for the Government to go further in amending complex tax rules, so that they benefit everyday Kiwi investors as well as the wealthy foreigners the Government is trying to attract.

Revenue Minister Simon Watts this month unveiled plans to change the Foreign Investment Fund (FIF) regime to give some foreigners with illiquid investments offshore an additional, possibly more advantageous, way of paying tax.

He said the Government would also consider exempting more Kiwis from the FIF rules, which incentivise domestic investment, but can be an administrative nightmare.

As it stands, most New Zealanders with more than $50,000 invested directly in offshore assets (like shares listed on overseas stock exchanges) must do a bit of paperwork every year, as these investments are treated differently to investments in New Zealand companies, and those made through New Zealand domiciled funds.

Sharesies investments lead Angus Watson is among those urging the Government to lift the $50,000 threshold, so retail investors don’t need to try to navigate two different sets of tax rules.

The threshold has been at $50,000 since 1999, so is capturing smaller time investors, who wouldn’t necessarily consider it worthwhile paying an accountant to do their taxes.

Furthermore, Watson was worried the rules disincentivised people from investing directly in companies listed on overseas stock exchanges.

He said Sharesies would, in coming weeks, release a tool to help its users manage their tax affairs under the FIF regime.

The challenge is, Sharesies doesn’t know how much its users have invested via other platforms or brokerages, so can’t notify all its users who need to pay tax under the FIF regime.

So, it’s been focused on educating users on what they need to do.

Investors first need to figure out whether they have more than $50,000 invested in assets that fall under the regime.

They fall into this camp if they paid more than $50,000 for their investments.

Shares in foreign companies or unit trusts are counted. Shares in some Australian companies are exempt.

Managers of portfolio investment entity (PIE) funds – which are very popular in New Zealand – need to pay tax under the FIF regime, but investors in PIE funds, including KiwiSaver members, don’t.

Once an investor has figured out whether they’ve crossed the $50,000 threshold, they need to choose which method they want to use to calculate the amount of tax they pay.

Typically, they use the ‘fair dividend rate’ method if they received positive returns and the ‘comparative value’ method if not.

Either way, a pinch point is they need to pay tax on a portion of the value of their investment, regardless of if they received income from that investment.

For investors that don’t fall under the FIF regime, they only need to pay tax on their income, like dividends.

Baker Tilly Staples Rodway accounting firm director Mike Rudd recognised that complying with the tax rules was fiddly and time-consuming, and therefore expensive.

Accordingly, he only really dealt with wealthy investors, who would probably still need his services if the Government lifted the $50,000 threshold.

Rudd couldn’t identify an easy fix to the challenges faced by retail investors navigating the FIF rules, without the tax system being reviewed more broadly.

Watts recognised the $50,000 threshold hadn’t been changed in years and was proving problematic for some investors.

He said the Government was looking into changing it, but didn’t put a timeline on this.

Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary press gallery. She specialises in Government and Reserve Bank policymaking, economics and banking.