The $50,000 foreign share threshold
The foreign investment fund rules have a cost-based exemption for eligible investors. The exemption and Australian-share exceptions have separate conditions.
On this page
- Threshold
- $50,000 total cost
- Measured on
- cost, not market value
- Tested
- at any time in the year
- Fair dividend rate
- 5% of opening market value
What the threshold switches on
New Zealand mostly does not tax capital gains on shares, and the foreign investment fund rules are the large exception. Above a threshold, overseas shares stop being taxed on what you received and start being taxed on a formula applied to what you hold, whether or not you sold anything and whether or not it went up.
Individuals and eligible trustees (type A) can use the exemption when the total cost of their attributing interests stays at $50,000 or less throughout the year, subject to opt-in rules. Exactly $50,000 is included. Choosing to return FIF income or loss can require continued use in later years. Other tax rules still apply to dividends and taxable disposals.
Cost, not value, and every day, not one day
Two details do most of the damage here. The first is that the threshold is measured on cost, generally the amount you paid, not on what the holding is worth now. A portfolio that cost $40,000 and has doubled is still under the line. A portfolio that cost $60,000 and has halved is not.
The second is that it is tested continuously. Inland Revenue asks whether the total cost was equal to or less than $50,000 at all times in the year. Exceed it on any single day and, in their words, all your attributing interests are subject to the FIF rules, and the first $50,000 is not exempt. There is no partial treatment and no averaging. One purchase in March can change how the whole year is taxed.
The two methods to choose between
Above the line there are six calculation methods with restrictions on who may use which. For an ordinary individual holding listed foreign shares, two matter. The fair dividend rate takes 5% of the opening market value of your holdings at the start of the income year, plus a quick sale adjustment where you bought and sold the same holding within the year at a gain.
Comparative value is closer to a real return: closing market value plus gains, minus opening market value plus costs, where gains include dividends received and costs include what you spent buying in. In a year where the portfolio fell, this figure is smaller than the flat 5%, and often zero.
An individual generally has the option of using the comparative value total where it comes out lower than the fair dividend rate, applied consistently across all their investments, with the total floored at zero. No FIF loss can be claimed from those investments. The practical effect is that 5% of opening value is close to a ceiling for someone who can use both methods, though Inland Revenue does not describe it in those words anywhere.
One consequence surprises people every year: under these methods the dividends you actually received are generally not taxed separately. They are absorbed into the calculation. Fee rebates are the exception and are returned as additional income.
The Australian exemption, and its four conditions
Shares in some Australian companies sit outside the FIF rules entirely, but being listed on the ASX is not enough on its own. All four of Inland Revenue's conditions have to hold: the company is on the official list of ASX Limited, it is an Australian resident and not treated as resident elsewhere under an agreement between Australia and that country, it maintains a franking account, and it is not stapled stock.
Where the exemption applies, no FIF income arises, but dividends still go in your return and a disposal may still be taxable if the shares were held on revenue account. Australian franking credits cannot be claimed against New Zealand tax. Inland Revenue publishes a checker for whether a particular company qualifies, which is worth using rather than assuming.