2.4 What is a foreign investment fund (FIF)
A Foreign Investment Fund (FIF) is a general term for an investment in different types of offshore entities. This includes the overseas shares that you hold through Tiger. Different rules may apply if you are holding a direct income interest of 10% or more (See 2.6).
A FIF includes:
- A foreign company, including a foreign unit trust
- A foreign superannuation scheme
- An insurer under a life insurance policy (if it is not offered or entered in New Zealand)
A FIF does not include:
- Ownership of a rental property overseas
- Income from foreign employment
- A direct income interest of 10% or more (See 2.6) in a controlled foreign company
- Debt instruments such as bank accounts, term deposits and loans
FIF rules may not apply if there is an exemption that applies (See 2.4.1). However, you may still have other tax obligations depending upon your investments (See 2.2 and 2.2.1).
If the FIF rules apply to you and your investment, you will have to work out your FIF income by using one calculation method (See 2.4.2).
2.4.1 FIF rules exemptions
There are two common exemptions from the foreign investment fund (FIF) rules:
· De minimis exemptions
If you're an individual investor who held rights of attributing interest from FIFs with a total cost of less than NZ$50,000 at any time of the year, you are not affected by the FIF tax rules, but you may have other tax obligations.
To calculate if the cost is less than NZ$50,000, please refer to (220.127.116.11)
· Exemptions for ASX-listed Australian companies
For more details, please refer to (3.1.1)
To check if any other exemptions might apply, please see https://www.ird.govt.nz/income-tax/income-tax-for-businesses-and-organisations/types-of-business-income/foreign-investment-funds-fifs/foreign-investment-fund-rules-exemptions
18.104.22.168 How to calculate if the cost is less than NZ$50,000 in total
The cost of your investment is the cost of acquiring your overseas shares including any brokerage fees. The cost is not the current market value.
In your Tiger Brokers Brokerage Statement, you can refer to “Cash Report – Net Trades (Purchase)” plus the commission fee for the purchase of shares.
To determine your total cost, you need to:
· Include all of your overseas interests in companies, unit trusts, FIF superannuation interests and life insurance policies.
· Exclude those investments that come with shares of 10% or more, or that fall within the various exemptions
If the NZ$50,000 threshold is exceeded at any time during the year, all your attributing interests are subject to the FIF rules, and the first $50,000 is not exempt.
However, even if the NZ$50,000 threshold is not exceeded, you may still have other tax obligations depending upon your investments (See 2.2 and 2.2.1).
2.4.2 How is FIF income calculated?
If no exemptions apply, you will have to work out your FIF (See 2.4) income using one of these methods:
Fair Dividend Rate (FDR) method
(0.05 x opening market value) + quick sale adjustment
FDR method can only be used when you can confirm the market value of your foreign shares at the beginning of the income year.
Comparative Value (CV)
(Closing market value + gains (includes dividends)) - (opening market value + costs)
You must use the CV method if the attributing interest is a non-ordinary share unless it is not practical to determine the market value at the end of the year.
Cost Method (CM)
(0.05 x opening value) + quick sale adjustment
You can use the CM method when you cannot confirm the market value of your foreign shares at the beginning of the income year. You may need an independent valuation of your shares before using the CM method.
Deemed Rate of Return (DRR)
Opening book value x deemed rate
You must use the deemed rate of return method in the case of a non-ordinary share if the CV method is not practical and you are unable to confirm the market value of the share at the end of the income year.
Attributable FIF Income Method.
Net attributable FIF income or loss × income interest.
Generally, the attributable FIF income method can only be chosen if sufficient information can be provided to the Commissioner to check the relevant calculations by a person with a direct income interest of 10% or more (See 2.6) in a FIF which is a foreign company. The calculations can be complex and are based on the CFC rules with certain modifications.
To see more details when choosing the method and calculating the FIF income by using the online calculator from IR. Please refer: https://www.ird.govt.nz/income-tax/income-tax-for-businesses-and-organisations/types-of-business-income/foreign-investment-funds-fifs/calculate-my-foreign-investment-fund-income
2.4.3 Option to choose between FDR and CV method
If you are entitled to choose between the FDR and CV methods, you may wish to calculate the FIF income results in both methods and choose the lesser one.
Please note, in this case,
- you must use the same calculation method and the total result cannot be less than zero which means you cannot claim a FIF loss from these investments.
- where you decide to use the FDR method for one investment, then you must use this method for all your FIF investments that year unless the legislation prevents you from using the FDR method for a particular investment
To compare the calculation of these two methods with examples, please refer to:
2.4.4 How would the exchange rate affect your FIF income
There are rules relating to currency conversions when calculating your FIF income or loss.
You need to apply one of the following methods:
· actual rate for the day for each transaction
· rolling 12-month average rate for a 12-month accounting period or income year
· mid-month actual rate as the basis of the rolling average for accounting periods or income years greater or lesser than 12 months.
You must apply the chosen conversion method to all interests in that and each later income year.
Disclaimer: The content of this page is for educational purposes only. It is designed to help you understand the potential tax obligations that may apply to you when investing in financial products. Tiger Broker does not provide any advice, including tax advice, and is not responsible for providing any guidance, opinions, or suggestions about tax for you. If you have any questions about your personal circumstances and tax obligation, we suggest you contact your tax advisor directly for more information.