Over the last 30-plus years residential property has been the choice of many, if not most, Kiwis when it comes to a stable long-term investment.
With the sudden increase in interest rates and several years where the government waved the proverbial stick at property investors, it’s no surprise that more people are asking what the alternative to property investment are.
So let’s take a dive into how the tax rules stack up for New Zealand tax residents that hold other investments.
NZ Bonds
Commonly, taxable income from a New Zealand bond is interest, with a resident withholding tax deduction. However, if the sale of a bond results in a gain, then that gain can also be taxable under the financial arrangement rules.
Foreign Bonds
Like New Zealand bonds and other investment yielding investments, income is generally in the form of interest. The amount of withholding tax applicable to the interest received will depend on the country of origin. Ultimately this interest must be included in a New Zealand tax return with New Zealand tax payable on the difference between the New Zealand tax rate and the foreign tax deducted.
Any gain on the sale of a bond will also be taxable, with the added bonus that any foreign exchange gain will also be taxable.
New Zealand Shares
Most New Zealand shares pay out dividends with a New Zealand tax credit of 33 per cent. However, a further six per cent tax will be payable if you are at the top 39 per cent tax rate.
But that’s not all. For those that have followed our articles in the past, CB6 – CB14 of the Income Tax Act should sound familiar. Those sections represent the minefield a property investor must manoeuvre to determine if the sale of a residential property is taxable.
New Zealand share investments are similar, albeit not quite as complex. CB3 – CB5 of the Income Tax Act covers “personal property” ie not land, but does include shares, by taxing:
- gains from carrying on or carrying out an undertaking or scheme entered into or devised for the purpose of making a profit
- gains derived from property acquired for the purpose of sale, or
- gains from the sale of property where there is a business of dealing in that property ie share trader.
Australian Shares
Most shares listed on the Australian Stock Exchange (ASX) are taxed in a similar way to New Zealand shares, albeit with two key issues:
- Australian dividends will often have Australian tax deducted in the form of franking credits. Franking credits cannot be used to offset New Zealand tax, therefore creating double taxation. This can result in an effective rate as high as 57 per cent on Australian dividends.
- The FIF rules below apply to some ASX shares that are not Australian resident companies.
Foreign Shares
The tax legislation regarding foreign shares feels like it’s from another country, or maybe even another planet. With that in mind, we can only cover a few key points that should be considered for those who have invested a total of $50,000 or more in foreign shares. Firstly the rules noted previously for New Zealand shares are not relevant, instead foreign investment fund (FIF) rules apply. FIF rules look to calculate notional ie. not real, income. There are multiple methods used to calculate this income. The two most common are:
- Fair Dividend Rate (FDR) calculates income based on five per cent of the shares market value.
- Comparative Value (CV), calculates income based on any unrealised and realised gains made during the year.
PIE, Bitcon
Portfolio investment entities (PIE) can hold several different types of investments, which apply the same tax rules mentioned previously. It has one large benefit, the maximum tax payable on a PIE fund is 28 per cent.
Bitcoin and other crypto currencies are taxable under the same CB3 – CB5. Given most crypto currencies do not have passive returns, it’s commonly accepted that crypto is mined or purchased with the intention of sale, making any gain taxable.
Property investors have had punishing tax changes, but maybe the grass isn’t greener for other investments when it comes to tax. The idea of New Zealand having no capital gains tax is not quite the full story.
The tax rules discussed are general in nature. Given the complex nature of these discussions, specific tax advice should always be sought.
Contact PKF Withers Tsang to find out more.