Article written by InvestNow – 11th September 2024

We recently surveyed our customers and were surprised to see that 38% of respondents don’t know what taxes apply to their investments.

The survey, which we ran last month, showed a startling lack of awareness or consideration of how tax impacted the performance of their investments.

Only 30% of respondents said they knew the types of taxes that applied to some of their investments but not all, and 8% didn’t know for any of their investments.

“We suspected many investors might be overlooking the impact of tax on their investments, but we didn’t think the numbers would be as high as this,” says InvestNow General Manager Mike Heath.

“Tax is the third leg of the stool, with the others being performance and fees, that materially influences how much your investment grows over time and we believe it’s essential that Kiwis understand this.

We all understand the power of compound interest, which apparently Albert Einstein referred to as the eighth wonder of the world. The more tax you pay, the smaller the value of your investment, diminishing the opportunity for the compounding magic to happen.”

Key takeaways from the survey include:

• 22% of respondents said they didn’t know what tax rate applied to all of their investments.
• 46% said they don’t, or don’t always, consider tax implications of their investments before they make them.
• Of those that don’t consider tax, the main reasons were they didn’t know how to (34%), and they didn’t think tax would make much difference (29%). A further 14% trusted that someone else did it for them.
• 63% either didn’t know if their portfolio was optimised for tax purposes, or knew that it wasn’t.
• Investors aged under 25 and those with portfolios worth less than $50,000 were more likely to say they didn’t know which taxes applied to their investments, whereas those aged 46+ were significantly more aware.

“There will be many investors out there paying thousands, if not more, in unnecessary taxes. In many cases, simply switching their investments into a more tax-efficient vehicle such as a Portfolio Investment Entity (PIE) managed fund could see investors significantly better off,” said Heath.

Younger investors, with smaller portfolios might appear to have less at stake, potentially face paying more tax for a much longer period of time, compounding the effect.

Cast your mind back to April this year, when the changes to the family trust tax rates were changed. This is a perfect example of why it’s key that investors take a close look at the tax impact on their investing decisions.

If you weren’t paying attention, you could easily have missed the top family trust tax rate going from 33% to 39% in April. You could also fail to recognise the opportunity to switch trust investments into managed PIE funds, which have a top tax rate of just 28%, and end up paying 40% more tax in real terms.

For the largest family trusts in New Zealand, not optimising that investment for tax by switching to managed PIE funds could mean paying more than $160,000 extra in tax per year. The difference can be huge over time.

“Fees and tax” is one of our 10 Investment Principles. For us, it’s crucial that investors take the time to understand how they could be taxed as part of researching their investments.

“Often, investors are really good at doing some of their due diligence, but that has to include looking at tax implications as well as the investments themselves. The InvestNow Investor Tax Guide is one tool that is designed to educate investors about the different tax considerations, and can help to make it much easier.”

Next steps:

1. Read our tax guide InvestNow Investor Tax Guide
2. Read our Family Trust article How trusts can side-step a 40% higher tax bill as new high rates kick in
3. Visit Inland Revenue website to confirm you are using the right resident withholding tax (RWT) rate and confirm rate in InvestNow account.