KEY POINTS:
The first day of April marks the start of a new tax year and the first of a number of changes to the taxation of investments aimed at tempting Kiwis to save more.
The changes have been primarily designed to remove some of the tax disadvantages for people investing in managed funds, especially people on low incomes, so as to encourage workers to sign up for KiwiSaver.
There are other spin-offs too, as well as some complications.
If you are already an investor, you need to be aware of the changes to taxation for offshore investments which come into effect on April 1.
Direct investors in overseas shares, that is people who own shares directly in their own names or via a family trust rather than through a managed fund, will need to consider before that date whether they should make changes to their holdings.
Direct investments owned on April 1 will incur tax on 5 per cent of the value of the investment on that date. This is called the Fair Dividend Rate (FDR) method of calculating tax.
You will be exempt from this tax if your total offshore investments are less than $50,000; however this exemption does not apply to family trusts.
If the actual return from your investments (that is, the dividends paid plus the capital gain) is less than 5 per cent, then you can choose to pay tax on the actual return instead.
Don't think you can sell all your shares on March 31 and buy them again on April 2 to avoid paying tax - that loophole has been closed.
For FDR purposes, investments in Australian-resident listed companies are exempt. Managed funds investing offshore will pay tax on 5 per cent of the value of their investments on April 1, and will no longer pay tax on capital gains.
The net result is that it now makes sense to consider investing offshore via managed funds rather than directly, providing of course that you choose your fund manager well.
Another spin-off is that under this new method, all overseas countries will be treated equally, whereas previously there was a tax disincentive to invest in emerging economies.
Further tax changes will be made on October 1. These changes will apply to managed funds investing in New Zealand and qualifying Australian shares.
Funds that meet certain criteria will be referred to as PIEs (Portfolio Investment Entities). These funds will no longer pay capital gains tax.
Tax on distributions made by PIEs will no longer be taxed at the company rate of 33 per cent but at the investors' marginal tax rate, except that the maximum rate of tax will be 33 per cent.
Investors on a marginal rate of 19.5 per cent or 39 per cent will therefore be better off.
Not only that, but investors earning less than $38,000 per year from non-PIE income and with total income of less than $60,000 will be taxed at a marginal rate of 19.5 per cent.
In other words, an investor who earns $38,000 in wages will be able to earn up to another $22,000 in PIE income at a marginal rate of 19.5 per cent instead of 33 per cent.
Family trusts investing in PIEs will be able to choose either a 33 per cent rate of tax or 0 per cent (in which case the beneficiaries pay tax at their marginal rate) and charities will be taxed at 0 per cent.
For investors on either a 19.5 or 39 per cent marginal tax rates, there will be considerable tax advantages from investing in PIEs rather than investing in shares directly as dividends will be taxed at a much lower rate.
All up, these changes to the taxation of investments are estimated to cost IRD at least $150 million in lost revenue.
* Liz Koh is a certified financial planner, a member of Institute of Chartered Accountants and runs an investment services firm in Paraparaumu.
- BAY OF PLENTY TIMES
