The FIF tax rules that were introduced for the years beginning on or after 1 April 2007 aimed to encourage savings by low and middle income earners and to remove inconsistencies in the old rules which overtaxed some investors using New Zealand-based managed funds, were biased in favour of direct investment in offshore shares, and favoured investment in certain countries over others.
A foreign investment fund (FIF) is an offshore investment that is:
- a foreign company
- a foreign unit trust
- a foreign superannuation scheme
- an insurer under a foreign life insurance policy
A FIF does not include term deposits, bonds, debentures, money lent, foreign employment, pensions, qualifying foreign private annuity or rental investments.
FIF income is attributed to an investor. This may mean an investor has FIF income before actually getting any money. There are various exemptions from the FIF rules. If no exemptions apply, you should work out FIF income under one of these methods:
- fair dividend rate (FDR) method: (0.05 multiplied by opening market value) plus quick sale adjustment
- comparative value (CV): (closing market value plus gains) minus (opening market value plus costs)
- method cost method (CM): (0.05 multiplied by opening value) plus quick sale adjustment
- deemed rate of return (DRR): opening book value multiplied by deemed rate
- attributable FIF income method: net attributable FIF income or loss × income interest
The NZ$50,000 threshold is intended to reduce compliance costs for investors with relatively small amounts invested offshore.
Foreign tax credits
Foreign tax, of the same nature as New Zealand income tax, can be used to reduce the tax liability in relation to foreign-sourced income that results in assessable income. Australian franking credits and the tax recorded for dividends received from the United Kingdom are similar to our imputation credits. This means they are not income tax paid by the investor so can’t be claimed.
You can claim the foreign tax credits up to the amount of New Zealand income tax payable on the FIF income associated with the attributing interest that has paid the dividend. If you have used the FDR method the tax credits can be used to offset the tax payable on the FDR income associated with that attributing interest.
Such foreign tax credits can only be used to reduce the income tax payable on your FIF income. If there is no New Zealand income tax payable on your FIF investment, no claim can be made for the foreign tax paid on any dividends received from the FIF. You can’t use foreign tax credits to get a refund or reduce tax payable on other income. This includes other foreign income with a different nature or source, e.g., dividends from companies with the Australian exemption and credits attached to United Kingdom dividends.
Generally these are forfeited (lost) if they are not used. You can’t carry forward unused foreign tax credits where you have used the FDR, CV, deemed rate of return or cost methods to calculate FIF income or loss.