New Zealand Tax on Investments
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.
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 1st April 2011:
- if your gross (pre-tax) annual income (including your salary, dividends and interest) is up to $14,000, you pay 10.5% RWT
- for incomes of $14,001 - $48,000, you pay 17.5% RWT
- for incomes of $48,001 - $70,000, you pay 30% RWT, and
- if your income is over $70,000, you pay 33% RWT.
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 taxed at 10.5%, 17.5% or 28% on their investment earnings depending on the individual investor's Prescribed Investor Rate / PIR. Your PIR is determined by your income. Your PIR is determined by your income.
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.
You will of course need to keep your investment manager updated as to your correct Prescribed Investor Rate or 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 28%. 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:
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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.
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For returns (capital change plus dividend) of 0% - 5%, you are taxed on the actual return.
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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.
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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