Anthony Edmonds – InvestNow
12th June 2017
This is a great question, and one we receive often from our customers and prospective customers.
If we assume that an investor has a tax rate of 33% for their FIF (Foreign Investment Fund) investments, and a PIR (Prescribed Investor Rate) of 28% for their PIE (Portfolio Investment Entity) funds, then when their global share returns are over 5%, they would pay 1.65% tax on their FIF fund investment (being 33% multiplied by the 5% FDR, or Fair Dividend Rate), and 1.40% for their PIE fund investments (being 28% multiplied by the 5% FDR rate). In this case the investor in the PIE is 0.25% better off.
However, there are various scenarios where the PIE investor is worse off.
For example, global share PIE funds always pay the FDR tax, even when returns are negative. In contrast an individual in a FIF fund can choose to move from the FDR methodology, and use what is called the CV (Comparative Value) methodology for calculating their tax (provided they use the same methodology for all their FIF investments in any given year). This means that in a year where global shares fell, which does happen from time to time, the investor in the FIF fund pays no tax if they use the CV method. Accordingly, this is a saving of 1.40% relative to the PIE in these negative return years.
Also, investors in FIF funds can elect to pay tax based on the value of their investments at 1 April. This is important to think about, as it means that contributions and gains made between 2 April and 31 March of the following tax year aren’t taxed (which is quite incredible). This results in another tax saving for FIF investors relative to using a global share PIE – reflecting that PIEs typically calculate tax each business day (meaning all contributions and gains made during the year are taxed).
When an individual has less than $50,000 in FIF global shares they pay tax differently, as just the dividends are taxed. This is covered in this guide from the IRD.
The InvestNow service provides consolidated tax reports to help our clients’ fill out their tax returns for FIF funds. This includes showing people what their taxable income is using both the FDR and CV methodologies (this is designed to help an investor can pick which is the more favourable method to use). Note though that a client with less than $50,000 in FIF global shares will still need to know that they should just pay tax on the dividends they receive (meaning they do not use the FDR or CV methodologies in this case).
Obviously a short-coming of being in FIF funds is that it is more work for the investor to do in terms of calculating and managing their tax. However, on the positive side are the effects that come from not paying FDR tax when returns are negative, or paying FDR tax on contributions and gains made during a year.
I haven’t gone into lots of the detail that is found in the IRD guide, but wanted to highlight that there are potentially some meaningful benefits from using FIF funds (and also PIE funds). How this works for individuals takes a bit of thought, as it will be a function of their specific circumstances. Also, there may be factors like tax slippage within specific funds that need to be considered separately by investors.
For advice specific to your personal circumstances it’s essential that you seek expert tax advice and/or contact the IRD.