Articles by Anthony Lipscombe
In March the IRD announced proposed changes to the Foreign Investment Fund (FIF) tax regime, aiming to reduce the perceived deterrent effect the current rules may have on new migrants and returning New Zealanders. This article explains what you need to know.
As background, the FIF rules apply to shareholdings that NZ tax residents have in foreign companies – subject to a number of exceptions. Exceptions include shareholdings in Australian resident and ASX listed companies, and shareholdings in foreign companies where NZ shareholdings have a controlling interest (subject to controlled foreign company rules). There is also an exemption if the total cost of all FIF interest is less than NZ$50,000.
If you hold shares in foreign companies, and are not eligible for an exemption, the current FIF regime operates largely on a “deemed” income basis, meaning that you can end up with tax to pay even when your offshore investments do not generate cash income. This is believed to be of concern for new migrants and returning Kiwis, who are accustomed to paying tax when dividends are received or gains on sale realised – quite understandable one could say.
The proposed changes seek to address these concerns by introducing a new method of calculating income on a FIF investment based on realised income.
The Government is proposing to introduce a new method under the FIF regime called the “revenue account method.” This method would apply from 1 April 2025 and would allow eligible individuals to calculate their FIF income based on:
• Dividends received, plus
• 70% of realised capital gains on the sale of applicable investments.
Importantly, this method is proposed to be optional. Taxpayers can continue to use existing FIF calculation methods if they prefer.
Who will be eligible?
The revenue account method will be available to:
• New migrants who become fully tax resident in New Zealand on or after 1 April 2024.
• Returning New Zealanders, provided they have not been tax resident for a minimum number of years. While the exact period is yet to be confirmed, it is expected to be less than the 10 years required for transitional residency.
• Trusts, where the principal settlor would qualify under the above criteria.
What types of investments are covered?
For most eligible individuals, the revenue account method will only be able to be applied to FIF investments in unlisted entities acquired before becoming a New Zealand tax resident. This reflects a narrow scope of application, focused on shareholdings in privately held, rather than publicly listed, companies.
However, individuals who remain subject to tax on a citizenship basis after becoming New Zealand tax residents may apply the method to all their FIF investments. This is a broadening of scope most likely applicable to migrants from the US.
Treatment of losses and exit tax
You may wonder how the rules apply if an investment is sold at a loss? The proposal is that 70% of the loss can be offset against income calculated under the revenue account method, either in the same year or carried forward to future years.
Another question that will arise is in regard to the implications of an eligible investor leaving New Zealand before they sell up, thus seeming to avoid the impact of NZ tax on any gain realised. To address this concern, the new rules may contain an “exit tax”, in the form of a deemed sale upon departure.
Where to from here?
It is important to appreciate that these changes are still proposals and have not yet been enacted into law. As always, the “devil will be in the detail” once there is drafted legislation. The Government expects to introduce legislation in the second half of 2025.
We will continue to monitor developments and provide updates as more information becomes available. In the meantime, if you believe these changes may affect your situation, please get in touch with our team for tailored advice.
We are looking forward to working with GRA and giving our financial affairs the due diligence they deserve. It was such a pleasure meeting with GRA on Tuesday. Thankyou for spending so much time with us. We appreciated and respected the advice that you gave to us and the integrity with which it was delivered. Many thanks and kind regards - AR - July 2017
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