Investing in the New Zealand Stock Market
In recent years stock market investors have done well in New Zealand. The major index, the NZX50, has risen by over 80 percent in the last 3 years (to May 2006) while the midcap index has risen by almost 100 percent.
New Zealand's advantageous tax regime, coupled with the favourable performance of its stock market, has significantly increased investor's wealth in the last few years.
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 residence 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, has said that such a tax would not be introduced. The minister is also on record as saying that introduction of such a tax would be "electoral suicide".
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$6 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.
In 2005, the median value of a company in the Russell 1000 was US$4.6 billion.
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. With the economy slowing in 2006, however, it is uncertain whether the NZX will continue to outperform its much larger rivals.
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
Example 1
Portfolio: You have $45,000 invested overseas. During the year, it increases in value to $49,999.
Tax to pay: None
Reason: Your overseas portfolio is worth less than $50,000.
Example 2
Portfolio: You have $100,000 invested overseas. During the year, it decreases in value to $99,000.
Tax to pay: None
Reason: You have made a capital loss. Losses are not taxed.
Example 3
Portfolio: You have $100,000 invested overseas. During the year, it increases in value to $104,000.
Tax to pay: You will taxed at your normal rate on $4,000. If your normal rate is 33 percent, you will pay $1,333.33 in tax.
Reason: If your gain is less than five percent of your portfolio's value at the start of the year, you are taxed on the actual gain.
Example 4
Portfolio: You have $100,000 invested overseas. During the year, it increases in value to $112,000.
Tax to pay: You will pay tax on $5,000. If your normal rate is 33 percent, you will pay $1,666.67 in tax.
Reason: If your gain is more than five percent of your portfolio's value at the start of the year, you are taxed on five percent of the portfolio's value at the start of the year.
