The FIF rules govern how income from certain foreign investments is taxed for New Zealand residents. These rules replace ordinary tax rules for qualifying investments and are mandatory for individuals who meet specific thresholds.
Who Needs to Apply the FIF rules?
Mandatory Application
The FIF rules apply to individual investors when:
- Their total foreign shares and attributing interests (excluding exempt interests) cost more than $50,000 at any time during the income year.
Exemptions
The FIF rules do not apply to:
- Transitional residents or non-residents.
- Shares in Australian companies listed on the approved stock exchange (use Inland Revenue’s FIF exemption tool to confirm exemptions).
Optional Application
Investors with foreign shares and attributing interests costing $50,000 or less may choose to apply the FIF rules voluntarily.
How the FIF rules Work
Exclusive Coverage
- If the FIF rules apply, ordinary tax rules do not apply to those shares.
- However, ordinary tax rules continue to apply for exempt investments (e.g., Australian exempt shares).
Income Calculation
Investors subject to FIF rules must calculate income using one of the following methods:
- Fair Dividend Rate (FDR): Assumes a fixed 5% annual return based on the opening market value of the investments.
- Comparative Value (CV): Calculates income based on changes in the market value of the investments during the year. Includes dividends and other income derived from the investments.
Key Points for Compliance
- Consistency: The same FIF method must be applied to all attributing interests in a given year.
- Deemed Income: The FIF method may result in income being taxed even if the investor did not receive actual returns.
Steps to Ensure Compliance
- Assess Applicability
- Determine whether your total foreign shares and attributing interests exceed the $50,000 threshold.
- Use Inland Revenue’s FIF exemption tool to confirm if any shares are exempt.
- Choose a Calculation Method
- Select between FDR and CV based on the nature of your investments and potential returns.
- Use the FIF calculation tool provided by Inland Revenue to simplify income calculations.
- File Tax Returns
- Report FIF income in your annual tax return.
- File an IR 1261 overseas income summary to ensure accurate reporting and to claim any foreign tax credits.
- Handle Non-Compliance
- If you didn’t report FIF income when required, refer to Inland Revenue’s guidance (QB 23/10) on correcting non-compliance.
Practical Example
Investor A:
- Owns $60,000 worth of foreign shares.
- The shares are not exempt under the FIF rules.
- Investor A uses the FDR method:
- Opening value of shares: $60,000
- Deemed taxable income: 5% of $60,000 = $3,000
- Investor A must include $3,000 as income in their tax return, even if no dividends or profits were realised during the year.
Resources for Further Guidance
- Inland Revenue’s Guide to Foreign Investment Funds (IR 461): Comprehensive rules and examples.
- FIF Exemption Tool: Confirm exemptions for Australian shares.
- FIF Calculation Tool: Assist with FDR and CV income calculations.
- IR 1261 Overseas Income Summary: Guide for reporting overseas income.
- QB 23/10: Steps for addressing non-compliance with FIF rules.
Common Challenges with FIF Rules
- Complexity:
- Understanding and applying the FIF rules can be challenging, especially for first-time investors.
- Professional advice is often needed for accuracy.
- Record-Keeping:
- Maintaining detailed records of purchase costs, dividends, and market values is essential.
- Choosing a Method:
- Deciding between the FDR and CV methods requires careful analysis of investment behaviour and potential tax outcomes.
Why Complying with FIF Rules is Important
The FIF rules ensure that income from foreign investments is taxed fairly and consistently. Proper compliance helps avoid penalties and ensures you meet your tax obligations without unnecessary stress.
For further insights, check out Inland Revenue’s comprehensive guide on FIF rules: IS 24/10 – Income tax – Share investments
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