Investing in the New Zealand Stock Market

New Zealand as a Stock Investing Tax Haven
One major incentive for investing in the New Zealand and Australian stock markets is that New Zealand has no capital gains tax.

Provided you are an investor living in New Zealand, there is no tax to pay when you sell your investments in New Zealand or Australia for a profit. (People living in Australia do pay capital gains tax.)

If, however, you are a share trader, (buying and selling shares frequently for a profit), your profits will taxed as part of your income.

Caution: New Zealand's lack of capital-gains tax is unusual in the developed world. It would be imprudent to make investment decisions based solely on the fact that there is currently no such tax. It is possible a tax could be introduced in future. The likelihood of this seems to be low at the moment. As recently as May 2006 the New Zealand Finance Minister, from the centre-left Labour Party, said that such a tax would not be introduced. The minister was also on record as saying that introduction of such a tax would be "electoral suicide". The election in November 2008 of a new, centre-right government means the likelihood of a capital gains tax in New Zealand has become even more remote.

Special Provisions for Migrants
For new immigrants there is a four-year tax exemption on overseas holdings. The exemption also applies to returning New Zealanders who have not been resident for tax purposes for at least 10 years before their arrival.

The New Zealand Stock Market
New Zealand is a small country. The largest companies traded on its stock exchange, the NZX, would not be considered large in countries like the US or UK. Many of New Zealand's companies would be considered to be microcap stocks in the United States. New Zealand's largest company (NZ Telecom) is worth about US$2.4 billion.

If NZ Telecom were a British Company, it would be too small to qualify for membership of the FTSE 100. If NZ Telecom were a US company, its size would qualify it for inclusion in the Russell 1000 index of the United States 1000 largest companies.

One of the drawbacks of operating in a small country is that; in order to grow significantly, New Zealand companies need to expand into other countries. Some companies, such as Michael Hill Jewellers and Fletcher Building, have done this successfully - in Australia. Others, such as NZ Telecom, Air New Zealand, Pacific Retail Group and The Warehouse have floundered badly when trying to expand into Australia or the UK, losing shareholders' money in the process.

Despite these problems, in recent years New Zealand has enjoyed healthy economic growth and New Zealand stocks have outperformed US and UK stocks.

Buying and Selling Shares in New Zealand
Most banks, such as ASB and National Bank, offer online share trading facilities. Shares can be bought or sold over the Internet for a fee of around NZ$30. The small size of the New Zealand stock exchange means that liquidity is much lower than in most stock markets. Trading shares in some of the smallest companies can take several days because there may be few other buyers or sellers.

Investing in Overseas Stock Markets from New Zealand
From 2007, if you are resident in New Zealand and have more than NZ$50,000 worth of investments overseas, you will pay tax at your normal rate on a small proportion of your holdings.

Shares in New Zealand and Australian companies are exempt from overseas tax provisions.

Examples of Offshore Investment Tax

Individuals can choose between two methods of tax calculation:

Fair Dividend Rate (FDR) Method

0.05 multiplied by opening market value plus quick sale adjustment

Opening market value is the total of the market values of the attributing interests in FIFs held at the beginning of the income year. Quick sale adjustment is an adjustment amount calculated when you both buy and sell attributing interest in the same FIF in the same income year. Comparative Value (CV) Method

(Closing value plus gains) minus (opening value plus costs)

Gains are amounts derived from holding (includes dividends), or disposing of the attributing interest and foreign withholding tax or other credits.

Costs include the cost of buying your investment(s) plus foreign income tax you are liable to pay and have paid on the FIF income.