2 Jan 2025
What Foreign Investment Fund Rules Mean for Migrants and Investors
Introduction
New Zealand continues to attract migrants from all over the world, including skilled workers, entrepreneurs, and tech professionals. The allure of a high quality of life, a stable economy, and stunning landscapes makes it a top choice for many. But before you settle in, it’s essential to understand the tax landscape—particularly the Foreign Investment Fund (FIF) rules that could affect your financial situation if you have investments abroad.
The FIF regime, which taxes income from foreign investments, has recently stirred some debate. While it’s important to look at both sides of the issue, let’s break down what it means for newcomers, business owners, and investors looking to start fresh in New Zealand.
What are FIF rules?
The FIF rules are New Zealand’s way of taxing income from overseas investments. If you’re a new migrant or returning Kiwi with assets abroad, understanding these rules is critical. Simply put, New Zealand taxes the income you earn from foreign investments—like shares or equity in companies—unless those investments fall below a certain threshold (currently $50,000 for individuals).
However, this system can impact professionals and entrepreneurs who move to New Zealand with stock options or equity in companies they’ve worked for abroad. While it ensures fairness, it’s seen as a challenge for attracting the highly skilled workforce New Zealand needs.
The Fair Dividend Rate: Taxing the Hypothetical vs. the Reality
Under the FIF regime, taxable income is typically calculated using the "fair dividend rate" (FDR) method. This means that even if you don’t receive a dividend, the New Zealand tax authorities assume you’ve earned a hypothetical 5% return on your shares and tax you based on that.
Let’s break it down: Suppose you have shares in a company valued at $1,000 at the start of the income year. According to the FIF rules, you’re taxed on a 5% return, which is $50. If your tax rate is 33%, that results in a tax of $16.50.
But here’s the catch: If your shares don’t actually pay dividends, you’ll still owe tax on that theoretical 5% return. This creates a dilemma for investors—how do you pay the tax when you haven’t actually received any dividends? It’s a challenge for those who prefer long-term investing over short-term gains.
Trading or Investing: Which Path Costs More in Taxes?
Let’s consider two investors: Sarah, who invests in New Zealand companies, and Tom, who holds shares in foreign businesses. While New Zealand doesn’t have a capital gains tax, it does tax profits made on trades. So, if Sarah buys shares in KiwiTech for $1,000 and sells them for $5,000, she’s taxed on the $4,000 profit.
On the other hand, Tom, who holds shares in a foreign company, is taxed differently under the FIF rules. If Tom sells his shares for $5,000, he’s taxed based on the 5% return assumption rather than the actual profit he made. This results in a lower tax bill for Tom despite both investors making similar financial gains.
Is the FIF Rule a Deal-Breaker for Migrants?
While the FIF regime may seem like a disadvantage, it’s important to look at the bigger picture. New Zealand offers several tax benefits that may outweigh the complexities of the FIF rules:
- No Capital Gains Tax – Unlike many countries, New Zealand doesn’t tax profits from selling investments.
- No Inheritance or Wealth Tax – You won’t face taxes on your inheritance or wealth in New Zealand.
- No Stamp Duty on Property Purchases – There’s no stamp duty when buying property, whether it’s your home or an investment.
- Four-Year Tax Holiday – New migrants enjoy a tax holiday on most foreign income (including FIF investments) for the first four years of residency.
Conclusion
For new migrants or investors moving to New Zealand, it’s essential to be proactive in planning your finances. While the FIF rules may seem complex, understanding them is key to ensuring your financial success. With the right strategy and advice, New Zealand’s overall tax environment offers significant advantages.
