KEY POINTS:
I was most interested in your Tower Tortis comments two weeks ago.
I purchased units in a growth fund based in the US during March 2003. The Dow Jones Index (US sharemarket index) has grown appreciably since that time. But my losses have been considerable.
The largest cause
of these losses has been the changes in the exchange rate - the NZ dollar appreciating - between the purchase date and the present.
Until the NZ dollar declines in value relative to the US dollar, these positions will not change, and our friend with his Tortis investment will continue to stagnate.
Not necessarily. His investment could still grow if the kiwi dollar remains where it is, or even continues to rise - as long as the return on the shares in Tortis International is high enough.
It's the sum total of the two - the share performance and the dollar performance - that matters.
You're quite right, though, that our dollar has appreciated considerably against the US dollar in recent years. And while international share funds, such as Tortis, hold shares in many other countries too, the kiwi dollar has also risen against most other currencies.
If our currency is worth more, that of course means other currencies - and investments denominated in those currencies - are worth less.
Since December 2000, when the reader invested, the kiwi has risen a whacking 62 per cent against the US dollar. And the trade weighted index, which measures the value of our dollar against our main trading partners, has risen 39 per cent.
That doesn't mean, though, that we shouldn't invest offshore. Over the long haul, our dollar is just as likely to fall as rise. And when it falls, that's a real boost for overseas investors.
A fall in the kiwi can turn a loss into a gain, and a gain into a big gain.
There's another point here, too. Another reader's recent letter expresses what is probably a common - and wrong - view. "As for diversification," he says, "overseas shares and NZ shares are so highly correlated as to provide minimal benefit."
Certainly the two markets - New Zealand and the world - sometimes move the same way at the same time. But it's surprising how often they don't.
A recent study of three-month periods in the last 30 years finds that in 66 of the 120 quarters both the local and world sharemarkets rose. Anybody invested in both markets is going to be happy with that.
The interesting bit, though, is that in two-thirds of the remaining quarters, when one market fell, the other one rose. In only 18 out of 120 quarters did both markets fall. It was quite rare for investors in both markets to face totally gloomy returns.
Keep in mind, too, that it's not all bad news for New Zealanders when the kiwi dollar rises. It makes it cheaper to travel overseas, and it reduces the price of imports.
That's another good reason to hold a good portion of your retirement savings in international assets, such as shares.
If you are a saver, you are probably hoping to spend a fair chunk of your retirement money on overseas travel and imported goods such as cars, electronic goods, books, music and clothes.
If the value of the kiwi dollar continues to rise between now and your retirement, the value of your international investments will be lower, but so will the costs of travel and imports.
On the other hand, if the kiwi dollar falls, the value of your international investments will be higher than otherwise, which will help you pay for the more expensive travel and imports.
In short, investing internationally leaves you less exposed to the harm that currency movements can do to your standard of living.
All of this assumes that your international investments are not hedged against currency changes - which is usually the case. You can, however, make hedged investments, in which the effects of currency changes are reduced.
* * *
Let's say a person with several US shares and a portfolio worth over the $50,000 threshold has several of these stocks placed in company dividend reinvestment programmes.
Each quarter a dividend investment statement is mailed stating the gross dollar dividend value, federal tax taken and then the net amount. This is then converted to a certain number of shares, which are added to the base shareholding.
For NZ tax purposes I have always shown these dividends in my annual tax return.
However, with the new system due to be implemented this year, what does one do?
* Include the dividend as usual and not enter it in the value of the shares, or
* Drop it from the dividend declaration and have it included in the value of the shares?
Will the IRD produce a booklet that could be used as a guide for those with overseas investments that clearly set out the rules of what can and cannot be done?
Yes. Inland Revenue has already published a summary of the new offshore tax rules on its website, www.ird.govt.nz (under "news and updates"), and it plans to publish a more detailed explanation of the rules on its website shortly.
"This will be followed by further help, including a booklet and an online calculator which will calculate the answers investors can put in their tax returns from the data they input," says the department.
In answer to your first question, "under the new fair dividend rate method dividends are not taxed separately and therefore do not need to be included in a person's tax return," says the IRD's Peter Frawley.
"Broadly, under the new method tax is paid on 5 per cent of the share portfolio's opening market value each year. In the reader's example the reinvested dividends will be picked up in the opening market value of the shares each year."
"If the investor is an individual or family trust and the total return (dividends and capital gains) on their portfolio of directly held shares is less than 5 per cent, then tax is paid on the lower amount."
No tax will be payable if the shares make a loss, after taking the dividends into account. In that case, then, you will receive those dividends tax-free - putting you at an advantage, in those years, over people not affected by the new tax rules. So it isn't all bad.
Frawley adds that taxpayers affected by the new rules will still be able to claim a foreign tax credit for the foreign withholding tax deducted from their gross dividends.
If they are paying no tax that year on their offshore shares, because they have made a loss, the credit will reduce payment of tax on other income.
* * *
You asked for older data on foreign exchange rates, for people calculating whether the new $50,000 tax threshold applies to them.
The Reserve Bank holds monthly NZ dollar exchange rates for the US dollar, British pound, Australian dollar, Japanese yen, and Germany's deutschmark, going back to January 1985. The deutschmark was replaced by the euro from January 1999.
Go to www.rbnz.govt.nz/statistics/, click on "Exchange rates" on the left side, and then on "B1 historical series".
The RBNZ also holds monthly NZ dollar/US dollar data going back to 1970, used in the calculation of the trade-weighted index. See www.rbnz.govt.nz/keygraphs/graphdata.xls and click on Excel tab 8.
Thanks very much. This is monthly data, and strictly speaking taxpayers are supposed to establish the exchange rate on the day they bought the shares.
However, Frawley says "The Reserve Bank monthly data will be acceptable to Inland Revenue for the purposes of applying the $50,000 threshold."
* * *
We couldn't help but respond to your column last week about "How to avoid a bad investment". It contained a tongue-in-cheek photo of a group of lions and tigers performing for a lion tamer with his whip in hand.
Unfortunately for us, the picture came with a warning: "Don't invest in companies whose ads have a picture of a statuesque lion or other jungle beast."
We were pleased to see your comment that this may rule out some good investments, but we still felt we should roar in protest!
We're a funds management business called Liontamer, and we sell capital protected investments - thousands of New Zealanders invest in our unit trusts.
Our funds obtain their capital protection by investing in notes issued by the likes of Barclays, UBS and Deutsche Bank. These have Standard & Poor's credit ratings equal to or higher than the big four NZ banks.
We certainly don't want our Liontamer brand to be put in a cage with a health warning to steer clear.
And perhaps other high quality investment managers such as ING (with a lion in their logo) might like to join us for a friendly roar of protest too.
Fair enough.
