NZ Revenue Minister Explains Tax Benefits Of FDR Rules

by Mary Swire, Tax-News.com, Hong Kong

03 April 2009

Recent media reports have revealed confusion about how individual investors in overseas companies are taxed under the new Fair Dividend Rate (FDR) rules that came into force in 2007, New Zealand's Revenue Minister Peter Dunne has announced.

"The FDR ensures that offshore investments are taxed on a deemed reasonable dividend yield of 5% of their value. That means individual investors in overseas companies are taxed on a maximum of 5% of the value of their investments in good years, when they increase in value," Mr Dunne explained, adding:

"For example, an individual with portfolio investments of NZD100,000 (USD56,306) that increase 10% in value will be taxed on deemed income of NZD5000 (USD2,816). For someone on a 38% top tax rate, tax owing on that NZD5000 (USD2,816) will be NZD1900 (USD1,069). In bad years, when there is an investment loss, the individual investor pays no tax on the investments. It is a slightly different story for investments in overseas companies via managed funds such as KiwiSaver."

Mr Dunne went on to remark:

"In both good and bad years, investment income is taxed on 5% of the investments' value. To keep things as simple as possible for managed funds, the new rules do not distinguish between years of increase or loss in value. However, investors in managed funds have the advantage of being taxed at a maximum rate of 30%."

"Many individual investors are better off under the new rules mainly because when things go badly they do not pay tax on their investments, even if they receive a dividend. Under the old rules, individuals paid tax on their dividends even if their investments went down in value. For example, someone whose NZD100,000 (USD56,306) investments went down 10% in value but who received a NZD3000 (USD1,689) dividend yield from the investments had to pay tax on that NZD3000 (USD1,689). Under the new FDR, that individual pays nothing."

"While not perfect, the new rules are much fairer than the ones they replace," Mr Dunne continued.

Dunne concluded by explaining that the old rules taxed offshore share investments unevenly, according to the country invested into and the intentions and purpose of the investor, "in particular, the old rules disadvantaged savers who invested offshore through actively managed funds because they were taxed on all their gains at 33%," he finished.

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