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The fund management industry is warning that looming tax changes on New Zealanders' investments are going to catch many "DIY" investors unawares.
"There's still a lot of small print that we're only gradually finding out about," says Donal Curtin, managing director of Economics New Zealand.
"For example, it's only just becoming clear that an Australian share, as defined under the new rules, isn't necessarily what you might think; only companies in a recognised index count and not all of those qualify," he says, warning that the April 1 start date for the changes is "just around the corner".
Inland Revenue says investments in listed Australian companies cannot be "stapled securities" (linked back to unit trust structures) as stocks Westfield and Macquarie Goodman are.
Well known Australian giant James Hardie Industries, is registered in the Netherlands so is seen by the IRD as a foreign company.
"What the legislation is saying is that if you invest in Australian shares that do not have a franking account or are not in the index, then this generally implies that the shares probably do not produce a dividend and hence the IRD has nothing to tax," says Linton Byfield, Spicers National Adviser support manager.
If an Australian share is excluded from the new rules then it will be taxed under international rules. Under these, the shares will be taxed on 5 per cent of the "commencing value" on April 1 each year. If the shares generate a return of less than 5 per cent, then the direct investor is only taxed on the actual return below 5 per cent.
The IRD has been very careful not to create loopholes and this why it is excluding companies like the Netherlands-domiciled James Hardie, says Andrew Johnson, head of relationship management at AMP Capital Investors.
Under the new legislation, investors will continue to be taxed on dividends received from investments in New Zealand and Australian shares but will no longer pay tax on their capital gains if the shares are held in a managed fund that meets IRD criteria or is "Portfolio Investment Entities" (PIE) compliant.
Another important rule change covers international managed fund and share investments. Annual income tax will now be payable on 5 per cent of their total value. Until now, tax on international assets was less predictable as it depended on where income was taxable.
"It does put a cap on your tax exposure if you've had a good run," says Curtin.
Those who have inherited investments from relatives overseas will have to prove when they first took possession of their investments. Individual investors with international shares and managed funds with international investments that cost less than $50,000 will continue to be taxed on the income from those investments and not on their overall value.
If they can't prove the worth of their investment when they first receive it, the IRD will value it from this financial year and halve it, says Simon Purvis, CEO of Vestar Investment Specialists.
Purvis is concerned that people are starting to drive their investment decisions by the tax changes. He and Curtin, chair of the investment committee at Vestar Investment, have been running seminars around the country on the tax changes.
"People have started making comments that they might just bring their funds back to New Zealand because it was too hard. But it is not too hard," says Purvis.
And the apprehension being felt by Kiwi investors seems to be having an effect.
Carmel Fisher, whose Fisher Funds invest solely in New Zealand and Australia, says she has seen a swing towards domestic stocks - which she thinks is healthy. "The pendulum had swung more toward offshore and is has now swung back to domestic assets," she says.
This legislation change should be perceived as a trigger for investors to review their overseas stocks just as you review insurance policies annually, she says. "Get back to the basics of, 'what do I want these investments to do for me?' Tax is just one criteria.
"We have a portfolio where [some of the companies] won't be tax exempt but we are not going to sell out of them." The reasons that they bought them - for potential growth - are still there even if they have to pay a bit of tax, she says.
The general message coming from the fund management industry last week was for investors to stay calm and remember they should never become involved in an investment purely because of the tax benefits.
"Investors should not pick an investment fully on tax, otherwise you are going into kiwifruit, llama get-rich-quick schemes," says Curtin.
On the Australian stocks like Westfield Rebecca Thomas, CIO of Mint Asset Management says: "We need to look at them on the investment merits of the individual stock, certain tax disadvantages not withstanding."
Byfield adds: "At Spicers, we expect our managers to invest in Australian shares based on the quality of the asset - they then consider any incidental tax advantage. Sure, tax is important, but the actual difference will only be at the margin in most cases."
For investors who have some international exposure, the new rules are relatively complex and many are seeking advice from their fund manager or attending seminars on the topic to gain some clarity.
The framework of the new legislation makes it simple and financially beneficial for investors in managed funds rather than direct investors.
While fund managers and tax experts continued to find fishhooks in the imminent legislation, others try to keep the message going that New Zealanders should be investing in overseas markets for the sake of their financial health.
Australia and New Zealand are not enough. Investors should be trying to ride the emerging markets with young populations and fast growing economies, says Thomas.
"Australia is a great proxy for what's going on in the rest of the world, it has been a growth story, but you need to look outside it," she says.
Despite complaints that the new legislation lacks clarity, the fund management industry is fairly pleased with the results, since it puts managed funds on a more level footing with its arch rival - property investment, says AMP's Johnson.
"From the residential property viewpoint, the market looks expensive. It is a timing issue. Do you want to be pouring more money into an asset class that is looking expensive?'
Simon Purvis believes now is a good time to invest internationally because of the strong NZ currency.
Only 2 to 5 per cent of Vestar's $1 billion of managed funds are in New Zealand stocks, the rest are spread internationally. Europe, at the moment is offering good value to international investors with companies in Germany are showing price/earning ratios of 12 per cent compared with those in New Zealand of 17 per cent.
New Zealand does not compete for equity investors. New Zealand is expected to grow by 3 per cent compared with almost double digits in China and India.
Purvis says his clients are "looking for growth and for liquidity. Would you buy Hallenstein Glassons or a top 50 company in Germany on a lower p/e ratio? I think people have come to an understanding that the NZ market is too heated, and there are opportunities lying offshore."
