NZ tax pain no April fools

The introduction of a Fair Dividend Rate (FDR) in New Zealand on overseas share investments by New Zealanders could impact adversely on inflows from that country to Australian managed funds from next year.

Effective from April 1, this year, the legislation changed the tax impost on direct investments made into international shares or through an Australian or other internationally-based unit trust or managed fund.

Prior to FDR, New Zealand’s non-trading investors paid no capital gains tax and were taxed only on income earned, with a credit for any withholding tax deducted under a double tax agreement with other countries.

Now, however, the New Zealand tax office taxes a deemed return of 5 per cent of the New Zealand dollar value on April 1, each year, of all overseas share and managed funds investments.

An exemption from the new FDR applies to individual investors with a total overseas investment of less than NZ$50,000 (A$42,000), but this does not apply to investments owned by a family trust or company.

In addition, the tax office now also applies a 5 per cent tax on the New Zealand dollar value of ‘quick sales’ occurring each financial year between April 1 and March 31. This catches overseas managed fund reinvestment of distributions plus withdrawals, including switches within a fund manager.

Financial planner Robert Oddy, managing director of Auckland-based International Financial Planners, believes the impact of the changes will become evident only when the next tax returns for investors are prepared after March 31, 2008.

“A lot of New Zealand investors are as yet unaware how painful FDR might be for investments into overseas shares and managed funds,” Oddy said.

Inflows could be further compromised by a separate new tax structure, with the acronym PIE, which allows New Zealand managed funds to collect investor taxes direct from New Zealand managed funds from October 1 this year, Oddy said.

“It has some tax advantages for high income investors and the appearance of less costs, and, as a result, we expect large numbers of investors to be persuaded to switch from overseas managed funds to New Zealand domiciled funds.”

He added that any New Zealand media focus on FDR costs is likely to add to a “movement away from offshore managed funds and shares to perceived less risky, high interest rate cash in New Zealand banks”.

In contrast, PIS national research manager Darren Howlin does not expect the FDR to be a “significant detriment to those New Zealand investors who want to diversify their portfolios outside of New Zealand domiciled products”.

Howlin, who manages PIS’ approved product lists for both New Zealand and Australia, said any potential impact on inflows would be mitigated by the “relevance of investors getting greater diversification from offshore into their portfolios”.

“Given the limited size and scale of the New Zealand investment universe, it’s questionable whether New Zealand investors would want to invest onshore solely to mitigate out what is essentially a tax on capital value.”