New Zealand Tax on Investments
New Zealand Tax on Investments | Broadbase International Ltd
Assuming you're a New Zealand tax resident, you'll
be liable for income tax on your investment income and in certain
circumstances on the capital gains on your investments.
The New Zealand tax system is probably not as
complicated as the UK tax system, but if you're a new migrant with a
lot of other things on your mind then it is certainly not entirely
straightforward! Below you'll find a basic guide to how investments
are taxed in New Zealand. We've also outlined the changes that are coming up from April 2010 in the Taxation (Consequential Rate) Act that was passed in December 2009.
If you have a more complicated investment
portfolio, you own a business, or you have a trust, and particularly
if you have offshore investments, it won't answer all of your
questions - we advise you to seek further specialist advice as
necessary to clarify your situation.
New Zealand Capital Gains Tax
There is also no comprehensive New Zealand Capital
Gains Tax regime, but as you'll see below there is an element of
capital gains tax on some investments.
In certain situations income tax (based on the tax
rates of the person or company in question) can apply to certain
types of capital gains generated - the most common example of this to
directly affect individuals in New Zealand (rather than companies,
who naturally pass this cost on to investors) is the capital gains
tax on residential property investment. There is also a tax payable
on some offshore investments which have a capital gains element.
We'll cover both of these situations in more detail in this article.
Tax on Interest - New Zealand's Resident
Withholding Tax
If you've got money earning interest in a bank,
building society or similar financial institution New Zealand, the
interest you receive on your money will be taxed. This includes fixed
interest investments such as secured debentures. The tax on your
interest is generally deducted from the interest as it is paid to
you, and is known as Resident Withholding Tax or RWT.
As of April 2009:
-
if your gross (pre-tax) annual income
(including your salary, dividends and interest) is up to $48,000,
you pay 19.5% RWT
-
for incomes of $48,001 - $70,000, you pay 33%
RWT, and
-
if your income is over $70,000, you pay 38%
RWT.
From April 2010, Resident Withholding Tax rates
will be more closely aligned with income tax rates (sometimes known
as marginal tax rates), with rates of 12.5%, 21%, 33% and 38% for
individuals.
You'll need to let financial institutions you
invest or deposit money with know which tax bracket you are in to get
the right amount of RWT deducted. If you don't tell them your IRD
number they will deduct RWT at the highest rate, which you can claim
back later if necessary. From April 2010 for new accounts and April
2011 for existing accounts people who do not confirm their correct
tax rate will also pay the highest rate of RWT.
For more information see www.ird.govt.nz/rwt/
Tax on New Zealand Residential Property
Investments
Residential property (buying a house to rent out)
is a very popular investment in New Zealand. In some cases the gain
in an investment property's value is taxable as well as the rental
income - if you have a history of regularly buying and selling
properties, even your family home, you should check your tax position
carefully. For more information see www.ird.govt.nz/toii/property/.
You can also download a handy booklet Buying and Selling
Residential Property (IR313) from this page.
Portfolio Investment Entities (PIEs)
Portfolio Investment Entities, or PIEs, are
managed funds and superannuation funds who can offer a favourable
return on their investments by electing to pay tax based on their
investor's tax rates. All KiwiSaver funds are PIEs, but not all New
Zealand managed funds and superannuation funds are PIEs. Portfolio
investment entities were introduced in 2007 to reduce the amount of
tax that managed funds pay on investment returns. The structure of
their investments is strictly regulated as part of the PIE
conditions.
PIEs are currently taxed at 19.5% or 30% on their
investment earnings. The investment earnings on a PIE are defined as
interest and dividends they receive, but not capital gains on their
exempt NZ and Australian investments. The tax is deducted
automatically by the investment manager and paid on your behalf. As
long as your PIE manager has the right tax rate for you, you do not
have to declare PIE income on your tax return.
From April 2010, PIE tax rates will be more
closely aligned with New Zealand income tax rates, so you will be
taxed at 12.5%, 19.5% or 30% on the investment earnings in your PIE.
This will benefit lower income earners, and higher income earners
continue to benefit from paying 30% tax on their PIE rather than
their income tax rate of 38%.
You will of course need to keep your investment
manager updated as to your correct tax rate (or Prescribed
Investor Rate / PIR) to ensure that you are paid the right rate
of interest.
Check the IRD website for more information on PIEs.
Tax on New Zealand Non-PIE Managed Funds and
Superannuation Funds
Managed funds, unit trusts and superannuation
funds that do not elect to be PIEs pay tax on their investment
earnings (dividends, interest and realised and unrealised capital
gains) at a rate of 30%. The taxes are calculated and paid by the
fund manager on your behalf.
Please see our separate article for more information on New Zealand tax on pensions.
Tax on Direct Investment - New Zealand and most
Australian Shares
Taxation on direct investment (individuals buying
stocks and shares in companies) is relatively straightforward in New
Zealand for New Zealand and most Australian shares - you pay income
tax on the dividends you receive and on any extra shares you receive
in place of dividends, but not on any increase in the share price (or
capital gains).
Most Australian
shares are exempt from Foreign Investment Fund (FIF) tax and taxed
only on dividends the same way as New Zealand shares. This exemption
applies to companies listed on an approved index of the Australian
stock exchange, including the ASX All Ordinaries index. A list of
these companies and more information is available on the IRD website.
Tax
on Direct Investment - Offshore Investments
For the purpose of New Zealand Foreign Investment
Fund (FIF) tax laws, offshore direct investments are:
-
shares in a foreign company
-
units in a foreign unit trust
-
a foreign superannuation scheme, or
-
a foreign life
insurance policy
As explained above,
most Australian shares are exempt from the FIF tax and taxed only on
dividends the same way as New Zealand shares.
UK personal and
occupational pensions meet the NZ Inland Revenue Department QFPA
(qualifying foreign private annuity) rules, so are not subject to FIF
(foreign investment fund) tax - this means that as long as you
cease to make contributions to your UK pension funds within four
years of the start of the income year in which you become New Zealand
tax resident, you are not subject to any New Zealand tax on the
growth of your UK pension fund until you take benefits from it.
The foreign life
insurance policy clause does not include UK term insurance policies,
but may affect UK endowment policies which have an element of
investment as well as an element of life insurance.
If you are a new
migrant and qualify as a transitional tax resident, you will not have
to pay tax on your overseas investments. The value of your offshore
investments is then calculated from the market value on the date that
you became a New Zealand tax resident.
New Zealand tax residents (who don't qualify as
transitional residents) whose offshore investments cost them less
than NZ$50,000 are taxed only on their dividend income. The $50,000
threshold does not apply to family trusts or companies, and different
rules apply if you own more than 10% of a company or if you have
voting rights in a company.
If however your offshore investments cost you more than
NZ$50,000 when you purchased them then any overseas shares will be
taxed on 5% of their market value at the start of the tax year or, if
lower, the actual return on the portfolio during the tax year
(including realised and unrealised gains as well as dividends
received). This is known as the Fair Dividend Rate or FDR. In essence you will be taxed as follows:
-
For returns (capital change plus dividend) of
over 5%, you are taxed on 5% of the value of your total foreign
shares (calculated at the start of the tax year). Dividends are not
taxed on top of this.
-
For returns (capital change plus dividend) of
0% - 5%, you are taxed on the actual return.
-
When the return (capital change plus
dividend) is a loss, there is no tax to pay.
For more information about tax on foreign
investment funds see the IRD website, www.ird.govt.nz/toii/fif/.
There is a handy foreign investment fund calculator which may help
you to calculate the tax on your FIF funds at
www.ird.govt.nz/calculators/keyword/incometax/calculator-fif-income.html.
At Broadbase International we specialise in providing expert, impartial financial advice for Brits in New Zealand and Kiwis returning from the UK. Don't hesitate to contact us if you have any questions about New Zealand investments or tax, and remember to ask for a free copy of our comprehensive New Zealand Guide.
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