Tax on ASX and overseas shares in New Zealand: the FIF rules

New Zealand doesn't have a general capital gains tax, but overseas shares can still be taxed on paper gains under the foreign investment fund (FIF) rules. The good news for trans-Tasman investors is that most ASX shares are exempt. This guide explains how the rules work and when they apply.

This is general information, not tax advice. Tax rules change; check IRD guidance or speak to a tax adviser about your situation.

What counts as a FIF

A FIF is broadly any investment in an overseas company, unit trust or fund. That includes US shares, European shares, overseas-domiciled ETFs and many overseas managed funds. If the FIF rules apply, you're taxed on a deemed amount each year rather than just on the dividends you receive.

The $50,000 threshold (de minimis exemption)

Individuals don't have to apply the FIF rules if the total cost of all their FIF investments is NZ$50,000 or less. Key points:

• It's based on what you paid, not the current market value. A portfolio bought for $40,000 that's grown to $70,000 can still be under the threshold.
• IRD guidance treats the test as applying throughout the income year, so if your total cost goes over $50,000 at any point, the FIF rules apply for that year.
• It applies to individuals (and some trusts). Companies don't get it.
• You can choose to apply the FIF rules even when under the threshold, but once you've included FIF income or loss in a return for the year, the de minimis exemption doesn't apply to that year.
• Investments that are already exempt, such as qualifying ASX shares, don't count towards the $50,000.

Below the threshold, you're taxed on dividends received, as with New Zealand shares.

The ASX exemption

Shares in many Australian companies are exempt from the FIF rules altogether. According to IRD, the company must:

• be on the official ASX list,
• be Australian resident for tax purposes (and not treated as resident somewhere else under a tax treaty),
• maintain a franking account, and
• not have shares stapled to another entity's units or shares.

Most large Australian companies such as the big banks, BHP, Wesfarmers and Telstra meet these tests. Things that commonly don't qualify include:

• ASX-listed ETFs and managed funds, even those holding Australian shares.
• Foreign companies listed on the ASX, such as companies incorporated overseas with an ASX listing.
• Stapled securities, which are common among Australian property and infrastructure groups.

If an ASX investment is exempt, you're taxed on its dividends only. Australian franking credits still can't be claimed in New Zealand. See imputation and franking credits explained.

How FIF income is calculated

If the FIF rules apply, the two main methods for individuals are:

Fair dividend rate (FDR)

You're taxed on 5% of the market value of your FIF investments at the start of the tax year (1 April), regardless of whether they went up or down. Dividends from those investments aren't taxed separately. There's an adjustment for shares bought and sold within the year ("quick sales").

Comparative value (CV)

You're taxed on the actual change in value over the year plus dividends received. If the total is negative, the FIF income is nil for individuals (you can't claim a loss).

Individuals can generally choose each year whichever of FDR or CV gives the lower result, provided they use the same method for all their FIF investments that year. That's useful in a falling market, when CV can result in zero.

Where NZX-listed funds fit

Many New Zealand-domiciled funds and ETFs that invest overseas are portfolio investment entities (PIEs). They calculate and pay FIF tax inside the fund at your prescribed investor rate, so you don't apply the FIF rules yourself. That's one reason some investors use NZX-listed funds for global exposure.

Dual-listed companies

A company listed on both the NZX and ASX is taxed according to where it's resident, not where you buy it. A New Zealand company such as Fisher & Paykel Healthcare isn't a FIF wherever you buy it. An Australian-resident company listed on both exchanges usually falls under the ASX exemption. See dual-listed NZX and ASX companies.

Record-keeping tips

• Keep a record of the NZD cost of every overseas purchase, converted at the time.
• Note which holdings are FIF-exempt and which aren't.
• Track your total FIF cost through the year so you know if you cross $50,000.
• Portfolio tracking tools and many platforms produce FIF reports; check what yours offers.

Frequently asked questions

Do I pay FIF tax on ASX shares?

Usually not. Shares in companies on the official ASX list that are Australian resident, maintain a franking account and aren't stapled are exempt. ASX-listed ETFs and foreign companies listed on the ASX generally aren't exempt.

Is the $50,000 FIF threshold based on cost or market value?

Cost. It's based on what you paid for your FIF investments, not what they're worth now.

What is the FDR method?

Under the fair dividend rate method, you're taxed on 5% of the opening market value of your FIF investments each year, regardless of actual gains or losses.

Are ASX ETFs exempt from FIF?

Generally no. The ASX exemption applies to shares in qualifying Australian-resident companies, not to ETFs or managed funds listed on the ASX.

Does New Zealand have a capital gains tax on shares?

There's no general capital gains tax, but gains are taxable if you bought shares mainly to sell them or are trading as a business, and the FIF rules can tax overseas investments above the threshold.