Foreign Investment Funds (FIFs) often form an important part of a private investment portfolio—whether a professionally managed investment portfolio or self-managed with an intermediary, such as Sharesies or the like.
Generally, a FIF can be a foreign company or a foreign superannuation scheme. The FIF rules impose tax on underlying income derived from or accumulated in such investments. FIFs do not include bank accounts (which are dealt with via their own rules), overseas rental income, foreign trust income, or foreign employment income.
It is not always clear how FIFs are managed and how FIF income is returned, so the following provides a brief understanding of the reporting requirements. Unrealised income from foreign investments can result in an unexpected tax bill, so it is best to be prepared.
The tax rules relating to FIFs apply to New Zealand tax residents if they have an attributing interest in certain types of overseas investments. Individuals and eligible trustees are exempt from the FIF regime if the total cost of their attributing interest was always less than $50,000 during the year. If the $50,000 is exceeded at any time during the year, the FIF interests will be subject to the FIF regime.
FIF income arises if you hold attributing rights in FIFs that are not exempt. This includes shares in foreign companies, shareholder decision-making rights in a foreign company, and a right to receive or apply any income in a foreign company. There are some specific exemptions, most commonly being certain ASX listed shares and direct interests in Australian unit trusts.
Once you have confirmed that you have received FIF income that must be returned for income tax purposes, you need to select a method of calculating FIF income that best suits your situation. FIF income can be calculated in five ways: Fair Dividend Rate (FDR), Comparative Value (CV), Cost Method (CM), Deemed Rate of Return (DRR), or Attributable FIF Method.
Every situation is different, though generally the FDR, CV and CM methods are used. FDR is the default method for calculating FIF income if the attributing interest is an ordinary share and the market value of that share at the start of the year can be determined. The CV method may be used for individuals and trusts if it is beneficial to do so.
Under most circumstances, FIF losses are built into the calculation and are not claimed separately.
Since the introduction of the FIF regime, reporting systems, including tax summaries for managed investment portfolios, have improved greatly. If you wish to discuss how FIF income may affect your return of income, please contact your Client Manager.
