Foreign Investment Fund Rules

Foreign investment funds rules are slightly complex. They are explained in section CQ5 of the Income Tax Act 2007. But in a simple language a foreign investment fund (FIF) is an offshore investment held by a New Zealand-resident taxpayer.

FIF generally includes some sort of shares or investment in foreign companies/ superannuation funds/ mutual funds/ stock market etc. Mainly FIF rules deals with shares in a foreign company. Also note that from 01-04-2014 the foreign investment fund (FIF) rules (which tax interests in foreign investments on an annual basis) will generally no longer apply to interests in foreign superannuation. Tax will only need to be paid when a payment is received or there has been a transfer to a New Zealand or Australian scheme.

There are some exemption such as:

• If the value is less than $50,000 for natural person FIF rules do not apply, Basically ignoring small investments
• Exemptions for shares in some ASX (Australian Stock Exchange) listed companies mainly due close economic ties.
• You should have less than 10% of the shares in a foreign company for FIF to apply. If it is more than 10% then FIF rules are ignored, it is kind of good for NZ to own foreign companies.
• And many other as listed in the Income Tax Act 2007. Please note general tax rules will still apply i.e. pay tax on dividend and gains.

The rules for FIF were in the legislation before but in 2007 reforms the Govt. tried to simply this by the introduction of Fair Dividend Rate Method (FDR) and Cost Method. All small investor will likely to choose FDR method in which 5% tax will be paid on the opening market value of that income year. FIF scheme was introduced to discourage New Zealanders to invest in overseas. If you look at overall approach the FIF rule mainly target overseas companies, who do not distribute dividend. NZ companies have good dividend pay-out as oppose to overseas companies, and the FIF rules mainly targeting increase in value of your foreign investments. Generally the Govt. want about 5% tax of total value of investment (FDR method).

If you have the land investment overseas, this does not fall under FIF rules. As FIF mainly deals with shares and investments and land is outside of it. However, if you make profit by disposing your interest in land, then the gain may become your taxable income.

Disclaimer: The following answer is based on general principles only. The facts and background information of particular cases always need to be considered carefully as it varies from case to case, and it may be necessary to seek professional advice.

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