New Zealand’s Foreign Investment Fund (FIF) tax rules are designed to tax income from offshore investments. These rules apply to individuals, trusts, and companies that hold investments in foreign entities. The FIF regime ensures that New Zealand tax residents pay tax on income derived from their overseas investments, even if the income is not repatriated to New Zealand.
The current rules are very unattractive to new migrants because migrants are required to pay tax on a notional amount of income (often unrealised), rather than on realisation (following the 4 year exemption if applicable). Like many New Zealanders, many migrants are asset rich and cash poor and may not have the cash to pay the tax on FIF asset gains until the assets are sold.
As part of a series of proposals to attract migrants under the Active Investor Plus visa (refer our article here), the New Zealand Government released a discussion document in December 2024 proposing options for change to the current FIF rules. These options effectively ensuring that taxing of FIF gains only occurs on realisation. If you really enjoy detail (27 pages), refer to the discussion document here.
What is a Foreign Investment Fund (FIF)?
A FIF is an offshore investment that includes:
- Foreign companies
- Foreign unit trusts
- Foreign superannuation schemes
- Insurers under foreign life insurance policies
When Do FIF Tax Rules Apply?
The FIF tax rules apply if the total cost of a person’s overseas investments exceeds NZD 50,000 at any point during the tax year (1 April to 31 March). This threshold is based on the cost price of the investments, not their market value.
If investments exceed this threshold, you must calculate and report your FIF income.
Methods for Calculating FIF Income
There are several methods to calculate FIF income, and the choice of method can significantly impact the amount of tax payable. The main methods are:
- Fair Dividend Rate (FDR) Method: This method assumes a 5% return on the market value of investments at the beginning of the tax year. It is the most commonly used method because of its simplicity.
- Comparative Value (CV) Method: This method calculates FIF income based on the change in the market value of investments over the tax year, plus any distributions received. It is suitable for investors who expect their investments to appreciate significantly.
- Cost Method (CM): This method calculates FIF income as 5% of the cost of the investments. It is less commonly used because it can result in higher tax liabilities compared to the FDR method.
- Deemed Rate of Return (DRR) Method: This method applies a deemed rate of return, set by the government, to the cost of the investments. It is rarely used because the deemed rate is often higher than the actual return on investments.
- Attributable FIF Income Method: This method is used for certain types of investments where the investor has significant control or influence. It calculates FIF income based on the investor’s share of the underlying income of the investment
Exemptions from FIF Rules
There are several exemptions from the FIF rules, including:
- Investments in certain Australian resident companies listed on the Australian Stock Exchange (ASX)
- Interests in certain foreign superannuation schemes
- Investments in foreign entities that are controlled foreign companies (CFCs)
If an exemption applies, you do not need to calculate or report FIF income for those investments.
Reporting FIF Income
If the FIF rules apply, a person must report FIF income in their tax return. This involves:
- Calculating FIF Income: Use one of the methods described above to calculate FIF income.
- Disclosing FIF Interests: Provide details of FIF interests, including the name of the investment, the country of incorporation or tax residence, and the market value in New Zealand dollars at the beginning or end of the tax year.
- Filing Tax Return: Include FIF income in an individual tax return (IR3) or trust tax return (IR6).
The Proposals
The Discussion Document considers that the current FIF rules may be unfair to new migrants, particularly those who own illiquid shares. This includes those who have been involved in startups and may have taken a shareholding, or who have been involved in owning and growing a business.
As iNZvest is in the business of working with HNW migrants investing in New Zealand, we know that these changes to the FIF rules will remove an impediment to overseas migration of high-net-worth individuals.
The Government is considering three possible solutions:
- Revenue account method
Unlisted overseas shares would essentially be treated as being on revenue account. Dividends would be taxed upon receipt and any gain on the shares themselves would be taxed on disposal. - Deferral method
This method would be a variation on the current FDR method. Unlisted overseas shares would be taxed on disposal. However, the gain would be calculated based on a deemed 5% annual return during the time the taxpayer is New Zealand resident. Additionally, this method would include a use of money interest component. - Changing the attributable FIF income method
This would allow the “attributable FIF income method” to be used by taxpayers who have a less than 10% interest in the FIF. Currently the method cannot be used unless the taxpayer has an interest of 10% or more.
The proposal is that all new methods are optional and would apply only to unlisted international shares. Debt investments and crypto assets are excluded from these proposals, despite many skilled migrants holding illiquid assets in these categories.
Conclusion
iNZvest has long understood that the current FIF rules are a deterrent to new migrants who have significant FIF assets. It is an issue we are asked to advise on regularly.
The proposals go some way to addressing concerns, and on first reading we favour the Revenue account method due to its simplicity.