KEY POINTS:
The year 2007 will be one of financial upheaval for many investors.
First up, just weeks away now, is a new tax regime on overseas shares, which kicks in on April 1.
Hot on its heels will be KiwiSaver, being launched on July 1, and then the introduction
of new-style managed funds on October 1 with potentially juicy tax breaks attached.
The overseas shares Fair Dividend Rate (FDR) tax changes are likely to be a headache for anyone with foreign shareholdings worth more than the $50,000 threshold when they bought them [$100,000 for couples], KiwiSaver is an opportunity for those willing to take it up, and the new tax rules on managed funds are a golden opportunity for those investors who can structure their income to pay tax at 19.5 per cent annually on income up to $60,000.
Although some of the changes are potentially lucrative for organised investors, put together it's a bit of a financial headache. On the other hand, sticking your head in the sand could get you in hot water with the Inland Revenue and lose you a chunk of free government money and some worthwhile tax breaks.
Overseas Investments
The FDR system means share and fund investments outside of Australasia will be taxed on 5 per cent of the value of their portfolio, regardless of the actual size of the dividend paid. That is reduced if there is a loss on the share.
It would, quite frankly, be possible to write a book explaining the FDR system to investors. The rules are a can of worms for investors who buy overseas investments directly and manage their own affairs. Investors and experts alike are coming across new fish-hooks nearly every week.
For example:
* The $50,000/$100,000 limit is a threshold, which means if you have $50,001 invested overseas, you'll be stung with the tax on all of your investments, not just the $1 in excess of the limit.
* For investments bought before 2000, you'll need to know the actual purchase price (that's what the $50,000 is based on) or work out half the current market value on April 1 this year.
* Although Australian shares were believed to be exempt, it now emerges that only 445 of the 477 companies listed in the Australian All Ordinaries index comply. There are 1300 other listed companies in Australia that don't comply.
* The IRD has still to release information to investors covering subjects such as how to account for dividends that are automatically reinvested and grow throughout the year.
An example of how confusing the rules are is the tax treatment of Australian-based unit trusts, says Paul Dunne, tax partner at KPMG.
Being able to apply for an exemption from the FDR and be taxed on the actual dividend depends on whether a company is listed in the Australian All Ordinaries index, is Australian resident and doesn't have dual listing in more than one country and maintains a franking account.
"Whether a company is Australian resident and maintains a franking account is not always self-evident," says Dunne. "Unit trusts, for example, do not maintain franking accounts, but do pass through franking credits to investors, a difference that investors may not appreciate."
The solution is to get your accountant or other financial professional to sort it all out for you at great cost. Or as financial planner Marie Quinn, of Marie Quinn financial services, says: "Sell up and buy managed funds."
There's more than a bit of sense in her tongue-in-cheek suggestion.
Nonetheless, says Jeff Matthews, senior adviser at Spicers Wealth Management, his company wouldn't suggest repatriating all your overseas funds to New Zealand investments at the moment. "We are less positive about the local market and economy because we think the local sharemarket is fully priced and growth prospects look better overseas."
Kiwisaver
Once you've recovered from the shock of the FDR, next up on the financial merry-go-round this year is the voluntary work-based retirement savings scheme KiwiSaver.
It offers $1000 from the Government if you sign up along with opportunities for a first-time buyer's mortgage subsidy, and tax breaks on money contributed by your employer. Even grandparents can start an account for grandchildren, who collect the $1000.
Quinn says, as many advisers believe, that you'd be crazy not to take up the free money, even if in the long run you decide to discontinue the account. It could, however, be a good springboard to long-term retirement savings for others.
Pies
Pies don't just make you fat. Portfolio Investment Entities (Pies) are new-style managed funds that will see many investors paying less tax.
Pies will be launched on October 1 and notably will not pay the capital gains tax now levied on managed funds. Existing managed funds can apply for Pie status as well as new ones. Income will pass through the funds directly to investors, who will be taxed at 19.5 per cent or 33 per cent maximum depending on their Prescribed Investor Rate (PIR).
There is also the chance for investors to have $60,000 worth of income each year taxed at 19.5 per cent if they tweak their portfolios correctly. Those who have non-Pie income of up to $38,000 and no more than $60,000 in total income will qualify for the appealing tax rate.
If they earn more than the prescribed limits, they'll pay a PIR of 33 per cent.
That means, says Matthews, provided you earn no more than $60,000 in total and you can juggle your portfolio, moving income from fixed interest and other non-Pie investments into the new funds, you could pay 19.5 per cent tax on your entire income.
This could, of course, mean a lot of work for investors and their financial professionals ensuring you have Pie status, and reallocating the portfolio to take advantage of what could be a significant tax saving and watching to make sure your stocks don't fall out of the Australian All Ordinaries index, move overseas or commit some other misdemeanour that precludes their special tax status.
There is a relatively simple explanation of both the FDR and Pie rules on the asb.co.nz website [click on Investments, Taxation of Investment].
* The IRD has published two reports on its www.taxpolicy.ird.govt.nz website to clarify matters for individual investors and family trusts in relation to the FDR rules and also plans an online calculator.
Wild Cards
All of this work and possible worry could be chicken feed if a recession starts to bite here or the property market collapses - against many pundits' predictions.
A review of financial intermediaries by the Ministry of Economic Development, expected to become law this year, is unlikely to come into force until 2009.
Changes are also afoot to the Family Tax Credit, and GST and provisional tax changes, details of which can be found on the IRD's Tax Policy website.
Finally 2007 is auspicious for other financial reasons.
The Chinese believe that a child born in the Year of the Golden Pig, which occurs only once every 600 years, is blessed with good luck and financial wealth.
