Fair Dividend Rate method is one of the method to calculate tax on Foreign investment portfolio(FIF).
Majority of small investor in New Zealand will end up using this method for simplicity purposes.
Threshold
1. Section CQ5 ITA07 $50,000 threshold
a. $50,000 threshold also includes foreign superannuation scheme and insurance policies.
b. It ONLY applies to the individual means natural persons.
c. Family trust (discretionary) do not get the benefit of threshold of $50,000, as it is perceived multiple trust can be used by a same person.
2. $50,000 is a threshold is not an exemption. Thus, if the value goes above the threshold the whole amount is applied for FIF rules
3. A married couple can qualify for $100,000 threshold if share of held jointly or individual on both of their names or combination of both.
4. Section EX47 ITA07 if the shares value is less than $50,000 in the beginning of the year and additional shares are purchased during the year which takes the total over the threshold, they will be subject to FIF rules for that year.
5. The threshold is only there for small individual investor.
Exchange Rate
1. The exchange rate on the date of purchase to be applied for the calculations. NZ Reserve bank website can be used for the exchange rates.
2. Taxpayer need to remain consistent with the use of currency conversion method.
Tax
1. Under Fair Dividend rate method (FDR) tax is paid 5% of the share portfolio opening market value each year.
2. No tax to paid if the total return is negative.
3. Only shares held at the start of the income year are considered.
4. If shares are purchased after the start of the income and sold before the end of the income year are referred as quick sales and are taxed lower of 5% of cost or actual gain.
5. Individual and family trust can use variation of FDR method, which is if they can demonstrate that the rate of return being below 5%, then their taxable income would be actual return for example 3%, if the return is negative then they do not pay tax. The formula to calculate rate of return is (closing value + sale proceed+ dividend) – (opening value + total new purchase)
Employee share scheme
1. Employee share purchase scheme exemptions: this exemption is mainly for employees working for Multination companies who are NZ employers and resident of grey list countries. The exemption is a time bound means an employee only gets 6 months to sell the share from the date is allocated, if not sold within six months then FIF rules apply. Please note any shares given as bonus will also be the income of an employee.
Disclaimer: The following answer necessarily sets out general principles only. The facts of particular cases always need to be considered carefully, and it may be necessary to obtain advice from a tax expert.
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