[MarkS]

Hi everyone,

For anyone still feeling confused about the new taxation on overseas investments (which kicks in as of tomorrow), I've found what seems to me to be an excellent explanation of how it all works. This is the first guide I've read that actually explains how changes to your portfolio during a tax year are taxed.

http://www.liontamer.com/Downloads/pdf/adviser_paper_tax.pdf

The more I read about the new law, the more relaxed I am about it. (Obviously, I'd rather not have to pay tax on investments at all, but back in the real world...) Personally, I don't see the new tax as being sufficient reason alone for most people with a portfolio of directly held shares outside NZ to sell up and re-invest the money in the NZX or ASX markets.

(The most obvious exception to that would be if you were being taxed on your foreign pension fund, and you couldn't withdraw money from that fund to pay the tax bill. I'm still trying to find out in exactly what circumstances foreign pension funds are subject to tax)

Hope that's of interest anyway.

cheers
Mark

[Rabbit]

Mark

There are two concerns that I have:

a) protecting my pension investments that I have allready made for my old age.

b) being able to continue to provide for my future period of unemployment.

I appologise to the other members, in that I am going to be specifc from a UK perspective.

Gordon Brown made a raid on pensions in the UK:

http://www.ft.com/cms/s/4bf76b38-df0c-11db-b5c9-000b5df10621.html

So we now pay an imputation credit at 22% in the UK for still maturing pensions funds left in the UK.

New zealand wants to charge a capital gain and imputation credit on forigen
held (e.g. UK non-grey list) pensions?

New Zealand does not recognise the tax wrappers of ISA's either, so they are classed as foreign funds and are taxable.

For new immigrants, there is a four year tax exemption, but what happens after that? - a tax liability on the UK pension and ISA holdings based on income and growth.

OK so we all come here, lull ourselves into to some false sense of financial reality, and get stung later on, no tax free allowance like the UK when drawing pensions, and the savings and provisions made in the old world start to get raided.

At the same time no tax allowances to make provision for later life, other than the miserable emerging Kiwisaver (4-8%).

Meanwhile, NZ continues to under-perform, sucks in a few more immigrants to support internal growth, as most of them are cash rich, bring old world new money with them, prop up the housing market etc etc.

Eventually, someone will have to pay for the growing NZ poverty and greying population.

It is the cash rich immigrants like the people on this board, that are ultimately keeping the country afloat - and proping up the housing market.

With -10% gdp, immigrants and the cash they bring are essential, in terms of keeping the NZ ship afloat.

So we are a pawn in the game, and are sold the 100% pure etc.

Compared to the UK it remains swings and round abouts - but for how long?

Rabbit.

[MarkS]

Rabbit,

Allow me to be blunt: while some of the things you say are correct, others are incorrect, and I disagree with the general thrust of your post.

Gordon Brown made a raid on pensions in the UK:
...
So we now pay an imputation credit at 22% in the UK for still maturing pensions funds left in the UK.

Untrue. Dividends come with a 10% notional tax credit attached. So if a company announces a dividend of 10p per share, you receive 10p per share. Notionally, the company has paid a dividend of 11.1p, of which you (as a basic rate tax payer) pay 10% tax, bringing it back down to 10p. As a higher rate tax payer, you would pay a rate of 32.5% on that notional 11.1p, meaning you receive 7.5p in dividend per share. So, the end effect is that a basic rate tax payer pays nothing, and a higher rate tax payer pays 25%. At no point does any "imputation credit at 22%" get paid.

Anyway, that's irrelevant, the credit was removed - yes, injustly, in my view - but removed it was, and there is no country in the world that you can live in to get that credit back.

New zealand wants to charge a capital gain and imputation credit on forigen
held (e.g. UK non-grey list) pensions?

Not really true. NZ is now charging a tax on foreign held investments. It is not a capital gains tax or anything to do with imputation credits, in fact it would probably be most accurately described as a wealth tax, as it taxes your investments at a fixed percentage each year. Even then, it's not really a wealth tax as the tax is decreased if you can prove you had a return of below 5%. This has the distinct advantage that if your investment returns more than 5%, you're making gains tax-free. Presumably, as an investor in the equities market, you're expecting to make a gain of more than 5% each year (which is only 1% in real terms right now after all!), so you should see a significant benefit here.

Also, the new rules do not (as I understand it) apply to all pensions by any means. The law appears to exempt "work-related overseas superannuation schemes" that were funded before moving to NZ (or in the first three or four [can't remember exactly] years after moving). The definition of what makes a scheme "work-related" is a little unclear, currently I understand it to mean that if the scheme were funded by payments that were determined as a percentage of your then salary, then it's work-related and thus tax free. So if you've put 5% of your salary into a scheme you're fine, if you've paid in say £200 a month for the last few years, irrespective of your salary, you might not be.

New Zealand does not recognise the tax wrappers of ISA's either, so they are classed as foreign funds and are taxable.

Sadly true, there is nothing like the ISA scheme over here. Yes your funds held in an ISA will be taxable. But, they will not be taxed particularly any more than those funds would be if they were moved to NZ and taxed here. (That's a generalised statement, not true in all circumstances, but true on the whole I would maintain). So, holding funds in an ISA does not entitle you to any privileges that the average Kiwi in the street doesn't have, but it doesn't punish you either.

For new immigrants, there is a four year tax exemption, but what happens after that? - a tax liability on the UK pension and ISA holdings based on income and growth.

Talking of holding privileges that the average Kiwi in the street doesn't have, there's one. The four year exemption should be considered a significant gift to you by the NZ government, not a right that gets withdrawn after 48 months here. You move to a country, you implicitly sign up to its taxation system. Oh, and the tax liability isn't based on income and growth - it's based on up to 5% of the portfolio's value, hopefully a lot less than a liability actually based on income and growth would be!

OK so we all come here, lull ourselves into to some false sense of financial reality, and get stung later on, no tax free allowance like the UK when drawing pensions, and the savings and provisions made in the old world start to get raided.

If you're lulled into a false sense of financial reality, then you haven't done your homework and I'm not too sympathetic. Referring to your pension being "raided" is emotive and unhelpful - that "raid" would occur whichever country you were in. And the allegedly "tax free" status of pensions in the UK is extremely overstated (more on that below).

(tbc)

[MarkS]

At the same time no tax allowances to make provision for later life, other than the miserable emerging Kiwisaver (4-8%).

Again, rubbish. Why do you need a tax allowance to make provision for later life? That's a view founded in the UK system, where the claim is repeatedly made about the supposed tax advantages of pensions. These advantages come from the fact that money going into a pension is not taxed, so a basic rate tax payer can put £100 into a pension at a cost to them of only £78, and for a higher rate tax payer the cost is only £60. Nice as this initial uplift is, there are two big problems. The first is that you pay tax when the money comes out. So the basic rate tax payer puts £100 into their pension, which only cost them £78. Fifty years later, they withdraw that same £100, get taxed on it, and so only receive £78. Not much gain there! The second problem is that you can't ever withdraw the money (well, 75% of the money) you put in - you're forced to use it to buy an annuity. Now, this isn't a bad option for a lot of people, but it isn't necessarily a good option, and the main point is that once you pay money into a pension, the price of the tax boost is that you lose control of it forever. And the tax boost isn't even that great as you get taxed on the way out!

The real tax benefits of UK pensions are far narrower. Firstly, there's the tax free lump sum of 25% of the fund value you can take when you retire - this is genuinely tax free. Or at least it is at the moment. By putting money into a pension now, you're effectively betting that no future government will decrease that tax benefit. Given the actions of the current government, I would consider that a poor bet. Secondly, the tax benefits seriously benefit those in the middle class who earn more than about £40k now and will earn less than that in retirement. That's because putting money into their pension now gets them relief at the higher rate now (40%), but (under the current rules) they'll pay only basic rate (~22%) then. Again, people in that lucky position (as I indeed was) are betting that situation won't change, despite the government already talking unfavourably about the injustice that (relatively) rich people get more of a tax break from pensions than poorer people.

Anyway, my point is that the UK system is what's called a EET system - your money is Exempt from tax on the way in, Exempt as it grows, then Taxed on the way out. NZ's system is a TTE system, the complete opposite. You're Taxed on the way in, Taxed as the fund grows, but can withdraw the money Exempt from tax. Mathematically, the two systems produce the exact same output for any given input! The advantage of the NZ system is that because the government doesn't give you the (supposed) advantage on the way in, they don't control in the same way what you can do with the money later on. The only advantages of the UK system are the 25% lump sum, and the higher rate/basic rate gain you can make if you happen to be comfortably middle class. The first might not exist by the time you retire, the second strikes me as rather unfair (again, I admit to benefiting from it),

To try to draw a conclusion here, I would assert that the difference in traditional pension savings in the UK and NZ are fairly inconsequential. As migrants, we might hit some edge cases whereupon we suffer the worst from both sides (e.g. an "ETT" type of result!), but there is minimal reason why that should be the case. The one big advantage that the UK has over NZ here is the ISA system - it is indeed a great shame that it's not replicated here. Note though that ISA are more like NZ superannuation schemes than UK pensions though, effectively they're TEE schemes. Very advantageous, and that's why the government restricts you to putting in £7k per year.

Meanwhile, NZ continues to under-perform...
sucks in a few more immigrants to support internal growth...
prop up the housing market...
someone will have to pay for the growing NZ poverty...
greying population...
cash rich immigrants ... ultimately keeping the country afloat...
proping up the housing market...
immigrants ... are essential, in terms of keeping the NZ ship afloat.
pawn in the game...
sold the 100% pure etc....

I can't politely express how much I disagree with that. NZ is a small, remote country with very real problems, of course it is. If any given person feels they've been misled before immigrating here, a big part of me feels sorry for them, but another part of me wonders why they didn't do their homework and how much self-delusion was going on. i see a lot of posts on this forum expressing very general and non-specific complaints about wherever "home" is, some very naively expecting life in NZ to be different. Every part of the world has its problems, you'll only ever swap one set for another. No one forced you to move to NZ, you are not a pawn in the game, some things are better here, others are worse.

This post is definitely not intended as an attack on Rabbit, if he's not happy here then he has my sympathies. What I am attacking is some of the untruths and half-truths that have been posted here many times, and which were repeated above.

Oh, and if anything above sounds too harsh, please point it out and give me the chance to correct myself, I've probably just expressed myself badly.

Mark
(four months in NZ, financially slightly worse of than in the UK, but happier)

[Junnifer USA]

I am from the US. With three types of retirement schemes. IRA and Keogh are set up under congressional regulations and the payments made into those schemes reflect a percentage of one's earnings. The last, annuities, are contracted with private insurance companies...and any amount can be nominated into them. I have choosen to break up the annuity, but am hopefull the IRA and Keogh will not be subject to the new tax laws.

Through my accountants (2) large firms, and investment bankers resources, (BNZ) and Macquaries (Aussie firm) nobody's accountants seem to have a clear definition on which overseas reitrement systems are going to be exempt...has anybody got a source..? IT would certainly ease our worries!
Thanks,
Jen

[johnandbethcox]

That's an excellent question...I have the same/similar one. If you have an IRA/401k/pension/whatever where you are locked out until retirement, is it subject to the same overseas investment tax laws? Or, are the taxes only applied to accessible investment accounts (i.e., stock/fund trading accounts, money markets, etc.)?

BTW - This has been a HUGELY helpful posting for understanding this law. Thanks MarkS!!!

[Super_BQ]

Not really true. NZ is now charging a tax on foreign held investments. It is not a capital gains tax or anything to do with imputation credits, in fact it would probably be most accurately described as a wealth tax, as it taxes your investments at a fixed percentage each year. Even then, it's not really a wealth tax as the tax is decreased if you can prove you had a return of below 5%. This has the distinct advantage that if your investment returns more than 5%, you're making gains tax-free. Presumably, as an investor in the equities market, you're expecting to make a gain of more than 5% each year (which is only 1% in real terms right now after all!), so you should see a significant benefit here.

And what about a paper loss? Let me describe this scenario: Starting with say $100,000

1st year you make a 10% gain = $110,000 so that means you have to pay the tax.

2nd year your portfolio drops over 20% leaving you no tax to pay - but a portfolio value of $88,000

3rd year it goes up 10% to $96,800 - guess what? YOU PAY for this gain.

So in 3 years you have a portfolio that is less than what you started despite there was 2 years of tax paid.

This was one of the arguments i've made to a (Dr. Cullen) representative in Wellington. While it was ok for IRD to tax on the gains, they make no concessions at years when there were losses. Regardless of you've sold the shares or not - it's a paper value assessment.

The first is that you pay tax when the money comes out. So the basic rate tax payer puts £100 into their pension, which only cost them £78. Fifty years later, they withdraw that same £100, get taxed on it, and so only receive £78. Not much gain there!

Uhm. and you never considered the results of tax free compounding? Be my guest if you think the difference is marginal:

http://www.njbest.com/about/for_parents.htm

The second problem is that you can't ever withdraw the money (well, 75% of the money) you put in - you're forced to use it to buy an annuity. Now, this isn't a bad option for a lot of people, but it isn't necessarily a good option, and the main point is that once you pay money into a pension, the price of the tax boost is that you lose control of it forever.

Not a good option? The question should be, "What other option is there once you decide to sell?" Look to the rest of the world, where residents can regularly buy & sell within the account and incur no taxes. The only tax (apart from dividends which in this comparison both pay) is the capital gain when you liquidate the portfolio upon retirement.

It's easy to call these ideas 'rubbish' but when you have say 400 million people living in N. America & the UK (which all have similar retirement superannuation schemes), it's pretty hard for 4 million NZ peeps to say otherwise.

Actually I can only think of the advantages of tax free compounding. Upon retirement, the person can control his annual taxes by only selling a portion of their portfolio (in annuity streams) that suit their income tax bracket. In NZ's TTE way, one has to earn above their disposable income before they can even consider investing into any retirement scheme. With the way real estate prices are, most people are already fully maxed out on credit and the last thing they're thinking of is investing.

By putting money into a pension now, you're effectively betting that no future government will decrease that tax benefit. Given the actions of the current government, I would consider that a poor bet.

How about the actions of NZ's Labour Gov't? A 2006 annual budget deficit of 15 billion, adding to a total of $147 Billion the country has in overseas debt. Uhm. I can't see how NZ is in better financial health than the UK. Actually NZ is more likely to see a capital gains tax of some sort (to address the nation's debt) in the near future than the UK removing that 25% tax free benefit. Remember, the Labour gov't has done this stunt before in the late 80s where they sold off the state owned assets privately (NZ Air, Telecom, etc.) just so they could make the nations debt look healthier.

Secondly, the tax benefits seriously benefit those in the middle class who earn more than about £40k now and will earn less than that in retirement. That's because putting money into their pension now gets them relief at the higher rate now (40%), but (under the current rules) they'll pay only basic rate (~22%) then. Again, people in that lucky position (as I indeed was) are betting that situation won't change, despite the government already talking unfavourably about the injustice that (relatively) rich people get more of a tax break from pensions than poorer people.

Perhaps we should believe that it's the poor people that pay the majority of the tax bill in any developed nation? Maybe it's the poor people are the ones that employ the people to work? IMO, those that work harder and pay taxes should at least be rewarded for their effort. When they invest a portion of their income into the stock market, they are also supporting big corporations which at the end.. also provide employment for the country.

Mathematically, the two systems produce the exact same output for any given input! The advantage of the NZ system is that because the government doesn't give you the (supposed) advantage on the way in, they don't control in the same way what you can do with the money later on.

I wish it were true for those that invest outside NZX/ASX. No credit is given when your foreign portfolio goes negative but penalised when going positive. There's a bigger disadvantage by limiting your investment scope to NZ & Australia.

A recent newspaper showed a joint venture HK & Canadian pension fund that will pay $2.24 BILLION to buy Yellowpages in NZ. If it's ok for such trans-national companies to invest into NZ, then why is it NZ people are penalised when they invest in those countries abroad?:confused:

NZ is a small, remote country with very real problems, of course it is. If any given person feels they've been misled before immigrating here, a big part of me feels sorry for them, but another part of me wonders why they didn't do their homework and how much self-delusion was going on. i see a lot of posts on this forum expressing very general and non-specific complaints about wherever "home" is, some very naively expecting life in NZ to be different.

Being misled isn't much of an issue for new migrants. In my view, it's the new policies that the NZ gov't has adopted over the past several years that scare earlier migrants away (mostly to Australia). I find the very reason why I left Canada, i'm starting to see happen here. While at the same time, Canada has gone the other way (ie. lowering taxes, lowering gov't debt, etc.)

Yes NZ is a small country. Like any small nation, the resources are small. However, (being rather blunt) the country tends to lack logic. Models that worked overseas don't end up being duplicated here. Instead, they wait for the problem to occur and then implement an idea different to the rest of the world.

Time for some ice cream! :nice1

[Trigirl]

The first is that you pay tax when the money comes out. So the basic rate tax payer puts £100 into their pension, which only cost them £78. Fifty years later, they withdraw that same £100, get taxed on it, and so only receive £78. Not much gain there!
Uhm. and you never considered the results of tax free compounding? Be my guest if you think the difference is marginal:

you invest £100, taking advantage of the tax free pension wrapper. due to compound interest it doubles so you have £200. you pay 22% tax when you take it out. you have £156.

or you pay tax on the way in at 22% so you have £78 of your £100 left. you invest it and due to compound interest it doubles so you have £156. no difference - exactly as MarkS says.

by the way the same maths works if you assume that investing makes it triple or whatever - the tax free wrapper for pensions causes no actual gain for the taxpayer who remains in the same tax bracket

so you seem to be suffering from some slightly woolly thinking there BQ. i appreciate this is a difficult area for people to get their heads round but i don't think it helps if some people post on here as fact things they clearly dont fully understand.


nobody's accountants seem to have a clear definition on which overseas reitrement systems are going to be exempt...has anybody got a source..?this is exactly what we've found also - nobody we've asked (including the IRD!) has been able to give clear info on this. we're in the wait and see situation - and hoping that by the time our 4 year exemption is up that there will have been either some test cases or some clearer guidance in this area.

[Rabbit]

A good discussion, and I yield to all the various points.

There are so many threads on the web regarding the evolution of this tax law that I have read over the last year or so, that I must admit I don't understand the short and long term implications of it all as there have been alot of twists and revisions along the way.

My desire is to understand the law from three perspectives, a) so I understand it so I know how and when I need to comply, and b) Understand any snakes in the grass in terms of increased tax liabilities in the future once the four year tax exemption expires. c) understand how much tax I will pay, once I retire. It stated in the blurb, that the four year period was to allow people to get their house in order, and in-order to do that we need to understand the rules and what we might be letting ourselves in for.

The NZ economy does have some unique challenges, and again I need to understand the future risks in terms of the currency and property market.

Ultimately, retirement will be funded by a number of things, e.g. Pensions, Property, Equities and other holdings that people have onshore and ofshore.

At the end of the day we will have to live on a net income in retirement and I want to be able to estimate what that will be, and also the associated tax liabilities.

So if we do not discuss things then we will all be no wiser. I suppose a bit of controversy at least helps to stimulate a response.

[Super_BQ]

you invest £100, taking advantage of the tax free pension wrapper. due to compound interest it doubles so you have £200. you pay 22% tax when you take it out. you have £156.

or you pay tax on the way in at 22% so you have £78 of your £100 left. you invest it and due to compound interest it doubles so you have £156. no difference - exactly as MarkS says.

I've made an Excel sheet that is attached to illustrate the differences between the 2 scenarios. The end results is considerable ; The following link discusses about savings for an education plan (ie for grandchildren) but the principle of tax free compounding still applies:

http://www.johnhancockfreedom529.com/public/page/?pageid=64

2 The projected values assume an initial lump sum of $10,000 is invested and $150 is invested each month thereafter for 18 years at a hypothetical compound annual growth rate of 7%, accrued monthly. At a 28% tax bracket, after 18 years, the investment would grow to $77,172 in a taxable account compared with $99,584 in a tax-deferred account. No consideration is given for state or local taxes.

Regardless whether invested income is pre-taxed or ex-taxed, the main discussion of this thread is IRD's taxing of individual overseas investments. As i've pointed out, the biggest disadvantage being the portfolio gets taxed in years when it goes positive and no tax credit back on years it goes negative.

[Trigirl]

fair enough - being from the uk (and given we were talking about uk pensions - see rabbits initial post?) i was comparing pension with the best alternative (ISA) which is not taxed on gains during the year and where therefore the results are the same. if you are taxed on growth in the year then its as you say. we're just talking about different situations.

[MarkS]

Ok, my posts above were really way too detailed (does anyone here actually care about notional tax credits on UK dividends? :laugh) , so I'm going to try to step back from the detail and more clearly convey my basic point.

There's a lot of uncertainty about the new tax laws, and that uncertainly leads to fear and concern. So posting the link at the top was not meant to spark any "controversy", just help shine a bit of light onto it all (as I found the link very educational).

A certain number of posts on this forum have responded to these new tax laws with comments like "the government is punishing us for wanting to invest overseas" or "Kiwis are not allowed to invest overseas at all". In reality, the more I learn about the new tax laws, the more they seem to me to be fairly similar in effect to taxation of domestic investments. That's about all you can really hope for in life! No, investing in NZ is not as benign as elsewhere in the world - there is no equivalent to the very real tax advantages of UK ISAs, or indeed particularly to the somewhat less real tax advantages of UK pensions. So if you move to NZ and have considerable investments, the chances are that are you'll be worse off financially in the long run than if you stayed at home (because of things like the unavailabilty of tax-free compounding).

There's an old joke about a tourist who stops in rural Ireland and asks a local for directions to his intended destination. The local replies (insert your own comedy Irish accent) "well, if I were you, I wouldn't start from here". I feel much the same about NZ's tax and investment climate - bits of it are a bit barking, and I certainly wouldn't advocate it as being an example for the world! But, if you choose to move here, you choose to live with that, and there's not a huge amount of point in complaining about it too much.

So, the main point again (for clarity): I do not believe that overseas investments are going to end up being taxed any more than domestic investments. Yes, they'll probably end up being taxed more than if you'd stayed at home, and that's one of the costs of moving over here.

[MarkS]

Just a few specific replies!

And what about a paper loss? Let me describe this scenario: Starting with say $100,000

Yes, that would be a bad situation. It's of course possible to contrive a situation that is either hugely advantaged or disadvantaged by these laws. The main point here is that the losses you suffer when you have growth of less then 0% (i.e. losses!) are made up for not being taxed on growth of over 5%. Over a reasonable term, you should gain more from the 5% cap than you lose from the lack of tax relief on losses.

tax free compounding
Sorry, I made my point there a bit poorly. I was trying to compare UK pensions to UK ISA schemes to show that the tax "relief" on pensions is a bit of a sham. I got a bit side-tracked there and didn't make the point very well - apologies. Tax free compounding is of huge significance indeed - sadly it is not available to us in NZ!

In NZ's TTE way, one has to earn above their disposable income before they can even consider investing into any retirement scheme.

Well, to be fair, anywhere in the world you need to earn more than you spend (which is what I think you meant) to be able to save money. How tax is applied is a little irrelevant there! It's not much good being able to get tax relief so that £100 invested only costs you £78 if you need that £78 right now to buy food for your kids...

How about the actions of NZ's Labour Gov't? A 2006 annual budget deficit of 15 billion, adding to a total of $147 Billion the country has in overseas debt.

I'm not sure what you're getting at here, but I think once again you're confusing the (very real) current account deficit with an imaginary budget deficit. The NZ government has had an overall budget surplus for years. See the other thread (http://www.emigratenz.org/forum/showthread.php?p=123747#post123747) for (much much) more on that!

Uhm. I can't see how NZ is in better financial health than the UK.
Now you're just putting words into my mouth! I didn't say that. What I did discuss was the potential for the UK government to alter pension legislation. Very different.

Similarly, when I was talking about the fact that the middle class benefit disproportionately from the pension tax relief, I wasn't making a political point about who pays the most tax and how just that was. The UK government has made it clear it's uncomfortable with this disproportionate gain and that it might be considering ways to reduce it (e.g. only offering relief at the basic rate of tax).

I wish it were true for those that invest outside NZX/ASX. No credit is given when your foreign portfolio goes negative but penalised when going positive. There's a bigger disadvantage by limiting your investment scope to NZ & Australia.

This is an example of exactly the kind of emotive talk I dislike here. You are not intrinsically "penalised" for investing overseas! A NZ share yielding 7% is taxed more heavily than a UK share yielding 7%. A NZ share yielding 3% is taxed more lightly than a UK share yielding 3%. I'm not saying there aren't distortions - there are. I'm not saying the system is perfect - it's far from it. I am saying that taxation of foreign investments is not really all that different from taxation of NZX/ASX

A recent newspaper showed a joint venture HK & Canadian pension fund that will pay $2.24 BILLION to buy Yellowpages in NZ. If it's ok for such trans-national companies to invest into NZ, then why is it NZ people are penalised when they invest in those countries abroad?:confused:

The "confused" smiley there is apt - you are confused. How is there any connection at all between a large company investing IN New Zealand, and people in NZ investing OUTSIDE? After all, it's good for a country when money comes in, and bad for a country when money goes out, so from that point of view the HK & Canadian group are doing a lot more for New Zealand than you are! (Not saying that is actually my view, the reality is far more complicated of course, but it's a valid point).

So, one last time, the point I'm trying to make: the new taxation of overseas investments is not all that different in scale to the taxation of domestic NZ investments.

[Rabbit]

Just thought I would highlight this paper compairing UK, NZ, US, AUS, CDN & USA pension systems.

It is all a bit of a rubic cube, and the paper is written from an AUS perspective.

http://ro.uow.edu.au/cgi/viewcontent.cgi?article=1119&context=commpapers

I suppose another dimension is once retirement income is drawn, how much gets eaten up with indirect taxes.

The above is probably off-topic, but its good fun trying to figure it all out, perhaps we will need a supercomputer? :laugh

[Super_BQ]

Very imformative link Rabbit. Looks like someone spent the time making up that analysis.

Apparently Canada's pension system hasn't changed much since I left.

Contributions made to a superannuation fund are tax deductible and amounts up to eighteen percent of earnings are tax exempt (Gollier 2000). If a payout from a Canadian superannuation fund is taken as an annuity, the benefits are taxed as income. Lump sum payments are also taxed as income however C$20,000 can be withdrawn as a tax-free lump sum for the purposes of purchasing a principal place of residence or financing education (Pearse 001). Further, funds can be withdrawn at any time from the RRSPs but taxes must be paid on the amounts withdrawn (Department of Social Development 2005, Pearse 2001).

In comparison's to NZ's Kiwi Saver 4 or 8% to save & a max of $5000 (http://www.hnzc.co.nz/hnzc/web/rent-buy-or-own/home-loans/kiwi-saver-and-the-deposit-subsidy.htm)subsidy towards your principal house. It's a start. BTW, the $20,000 CDN is not income tested like the Kiwi Saver scheme.

An important aspect missed in that article about Canada's 3rd tier super-annuation scheme is that the unused limits can be carried forward and back. That is what ever 18% reserve portion you don't use up in 1 year can be allocated to the next year (thus effectively having more than 18%). Likewise, a person can over-contribute (ie 25% of income) in 1 year and on the next year, can claw back the remaining unused portion (say if they only used 11%).

Appendix 1 also doesn't reflect the true 'marginal tax' bracket in Canada / US. Depending which province/state you live, there's the additional provincial / state income tax portion on top of the federal.

[rockyhopper]

I do not believe that overseas investments are going to end up being taxed any more than domestic investments

Sorry that I don't understand the tax system in NZ well enough and have to ask a stupid question...

Does this mean that if I invest solely in NZ, I wouldn't be taxed with a cap of 5% on my net worth?

From what I've seen so far, if I'm doing OK enough (meaning beats 5% total return each year, which shouldn't be too difficult in most years) on any foreign investment worthing more than NZD 50k, I'd taxable on 5% of my portfolio worth. If I invest the same amount in NZ stocks and make the same return, would I be taxed on 5% of my net worth? Or just my dividend?

Please give some advice. I'm seriously considering dropping my ITA with my plan to live off my investment return in NZ

[Trigirl]

firstly I'm seriously considering dropping my ITA with my plan to live off my investment return in NZ make sure you don't say anything about planning to live off investments at your visa interview or you will get turned down!

if you are planning to live off your investments you need professional tax advice. but the basics are that you will be taxed in two different ways. on your NZ and australian investments you will be taxed on their dividends only. plus you'll be taxed on your whole foreign investment portfolio (the $50k is for the portfolio not each individual investment) as though it had grown 5% of its value each year (ie you pay tax on 5% of the value of your foreign portfolio at 1 April) unless you can show it actually grew less than 5%.

you wont be taxed on your foreign investments for your first 4 years in the country.

[MarkS]

you'll be taxed on your whole foreign investment portfolio (the $50k is for the portfolio not each individual investment)

Just to make sure it's completely clear - if your overseas portfolio is $49,999.99, you don't pay any tax. If your overseas portfolio is $50,000.01, you pay tax according to the full value of it (i.e. $50,000.01 * 5% * your tax rate).

Of course, if you're in a couple, you could together have up to $100k overseas without having to pay tax. But it might not be wise to get too close to the limit, as exchange rate fluctuations might cause your value to get pushed over the limit (although I'm not sure if they would use historic or current exchange rates for determining the value - I'm assuming current, but could well be wrong there)

So, broadly, you'll pay tax on 5% of your overseas portfolio, and income tax on the dividends on your NZ/Aus portfolio.

Just to be clear, my statement that you quoted above was meant in very general terms - obviously if your entire NZ portfolio is in stocks that pay no dividend at all, you'll pay more tax on the overseas portfolio! Similarly, if your NZ portfolio yields 10% in dividends, you'll pay a lot more tax on that. But in the averagely typical case, the resulting taxation should be roughly the same on both sides (and shouldn't be the hugely punitive tax on foreign investments that it's sometimes made out to be).

This also only applies to direct share holding. If you're holding managed funds and are a 39% tax payer, there can be a significant advantage to holding NZ based funds, as the tax there is applied at a maximum of 33% (if the fund is structure correctly).

But yes, you definitely need professional tax advice if you want to live off the money - you shouldn't trust anything you read here too much! :)

[rockyhopper]

Thanks Trigirl and MarkS for your explanation and advice

It looks to me the way this tax is structured is favouring investment in NZ... Which is quite strange b'coz I don't incur much cost to NZ if I invest overseas and then consume my money here. And with the higher gain overseas, I'd more than likely not to tap my hands on the social benefits in NZ.

firstly make sure you don't say anything about planning to live off investments at your visa interview or you will get turned down!
I do intend to work in NZ but on my own terms. I'm tired of the rat race where I've to work on things I've no interest on to make a living.

[suebeenz]

this is exactly what we've found also - nobody we've asked (including the IRD!) has been able to give clear info on this. we're in the wait and see situation - and hoping that by the time our 4 year exemption is up that there will have been either some test cases or some clearer guidance in this area.


I was wondering about this 4 year exemption. Reading things over, it wasn't clear to me if this applied to my day-trading ways. That is, short term capital gains on stock bought and sold overseas. To be clear, I do already pay foreign tax on these gains.

[rockyhopper]

Just to be clear, my statement that you quoted above was meant in very general terms - obviously if your entire NZ portfolio is in stocks that pay no dividend at all, you'll pay more tax on the overseas portfolio! Similarly, if your NZ portfolio yields 10% in dividends, you'll pay a lot more tax on that. But in the averagely typical case, the resulting taxation should be roughly the same on both sides (and shouldn't be the hugely punitive tax on foreign investments that it's sometimes made out to be).


Hi MarkS, the tax collected is not really the matter here. It's the effect on the portfolio worth after a period of time. If my calculation is not incorrect, for the below situation, you can see the difference:

- Initial investment, NZD 1M, Expense NZD 60K p.a (Exlcuding tax on investment gain)
- NZ Investment (Dividend yield: 8% p.a., Price appreciation: 4% p.a.), tax at 33% on dividend p.a.
- FIF (Dividend yield: 4% p.a, Price appreciation: 8% p.a.), tax rate 33% on 5% year-begin investment value p.a.

30 Years later,
- NZ investment worth is 3.9M, tax paid is -1.5M
- FIF investment worth is 3.1M, tax paid is -0.9M

*Note, since GST is built-in in the expense and will be the same in both case, it's not considered in the tax paid

So, you'd be better off with NZ investment for an effectively equal return (12% p.a.) portfolio although you paid larger tax!

Moreover, in the early years, people with FIF-only portfolio will have a withdrawal rate of 2-3% while for that for NZ is below 1%. Implying if the investment forecast is too optimistic that the actual is far below 12% p.a., the FIF-only investment will do far worse off with the cost-averaging down effect... This will be devastating if it happens at the early years. Result of this would possibly be some FIF investors who could have managed on their own will become too old to find a job in their later years and rely on social security.

I can show you the spreadsheet on the details on how to arrive at this conclusion.

[MarkS]

Hi,

Can you post your spreadsheet? I can't replicate your numbers at all, and they do seem rather counter intuitive.

I assume you're not reinvesting dividends there? You can't be, as 1M compounded at 12% over 30 years comes to a lot more than 3.9M, even after tax. If you're not reinvesting dividends, does that mean you're taking an income before tax of 4% from one investment and 8% from another? If so, that's really not a fair comparison.

Also, what's the $60k in annual expenses for? Does that increase in line with the fund? (i.e. are you withdrawing a 6% charge each year?) If you're facing 6% in charges, sounds to me like you're getting fleeced!

cheers
Mark

[Rabbit]

http://www.nzherald.co.nz/section/3/story.cfm?c_id=3&objectid=10432824

I still do not understand the potential impact on my overseas held pension that is still growing in a tax friendly regime and my other portfolio of offshore holdings that are held within a tax free wrapper.

So there are three groups that need further info:

1. existing immigrants who have been here a number of years.

2. Immigrants who are subject to the 4 year rule and want to understand the future implications and what they are letting themselves in for.

3. Potential immigrants considering the move to NZ.


Can someone clarify?

Rabbit.

[Super_BQ]

Rabbit,

I think that link you posted pretty much covers everything.

1. existing immigrants who have been here a number of years.

2. Immigrants who are subject to the 4 year rule and want to understand the future implications and what they are letting themselves in for.

3. Potential immigrants considering the move to NZ.

The key point is RESIDENCY. If you are currently a new or old NZ resident, then these new tax laws apply. Even for potential new immigrants wanting to come to NZ, the day they get permanent residency status is the day their overseas portfolio will be valued for that 5% taxation rule.

The 4 year tax free rule temporarilty exempts new residents into NZ (on all sources of income) but after the 4 years, then their portfolio will be subjected to this new rule. (where by that time you would of liquidated your portfolio to less than $50K threshold).

Those smart enough that have lived overseas say in the UK for at least 10 years can come to NZ to take advantage of the 4 years tax free status then move back overseas.

The only way I can think around this new foreign investment tax is to declare NON-RESIDENCY status in NZ. But that would not be the case for new migrants coming to NZ. For those already here in NZ, achieving non-residency is difficult to do. I mean to have a NZ job that can allow you to live in another country for more than 6 months. In addition the proof that you don't own a house or other major assets in NZ, family, etc. The ideal case would be a self employed person that just comes to NZ temporarily & run a seasonal business. Also not having family or other ties in NZ that would deem you as a resident.

The residency & non-residency tax laws in Canada have proved this very well. There have been cases where a person that has never stepped foot in Canada was deemed resident of Canada and thus his worldwide income was taxed in Canada. Then there were cases where a person living in Canada for many years tried to claim residency but the tax court ruled that he wasn't because of his lack of ties with the country (person wanted the free social benefits etc.). Fortunately, I don't think the NZ tax code and precendant court cases are as comprehensive as Canada's but you can be pretty sure NZ is catching up. Over the past 10 years more and more loopholes have been covered up as the NZ tax act book gets thicker.

[MarkS]

Thanks for the link, Rabbit, there's one particularly interesting thing there:

Q. We have a couple of shares which were bought some years ago for around 2000 and are now worth 55,000.
How does one calculate the conversion to NZ dollars? Is it the rate that applied at the date of purchase, and if so where can one find out the exchange on a certain day, say in 1997.

A. You should use the exchange rate on the date of purchase.

That could be useful to know - I'd assumed that they would use the current exchange rate. So that makes it theoretically possibly that you could sell down to just below $50k, and then leave it well alone. It'd only be worth doing that if you were in pretty low-yielding shares though, as you still have to pay income tax on the dividends.

Can someone clarify?

You could always ring up the IRD and ask them? When I rang them, they assured me that my UK pension would not be taxed in NZ