There are two key tax changes in the Budget.
Photo: RNZ/Liam K. Swiggs
Commentators are welcoming two key tax changes announced in this year’s Budget.
Foreign investments
The first is a significant shift in the foreign investment funds (FIF) regime, increasing the threshold from $50,000 to $100,000.
At present the FIF regime applies to any overseas shares, ETFs or funds where the cost of the amount invested exceeds $50,000 in the tax year. Tax is often paid on 5 percent of the value of your investments each year.
The FIF regime is a response to the fact that New Zealand’s sharemarket is dividend-heavy compared to international counterparts. Dividends are taxed but capital gains are not, and the FIF regime was an alternative way to apply tax in that scenario.
Taxpayers will also be able to choose to use the revenue account method (RAM) which had previously only been available to new immigrants or those returning to the country after a long period away.
This option is available for unlisted share investments. Rather than being taxed on an annual appreciation in share values, instead it applies tax to dividends as received and then also any capital gains made on the eventual sale of the shares, discounted by 30 percent.
Dean Anderson, founder of Kernel Wealth, said it would make quite a material difference to everyday investors.
Changing investor behaviour
“A lot of Kiwis do talk about FIF tax and it’s a tax that has not been changed for 20 to 30 years, since it came into effect. It creates quite a high tax liability investing overseas. The $50,000 threshold is a sort of marker that a lot of people talk about, where some investors will only try to invest up to $49,000 and then they’ll use pie funds after that. The reason being that under $50,000 it’s a fairly low tax and it can be quite cost-effective to invest directly overseas.
Kernel founder Dean Anderson.
Photo: Supplied / Kernel
“What this means now is $100,000 or for a couple with two accounts potentially $200,000 of purchasing power of overseas shares or ETFs where you have a relatively low tax burden. I think that’s going to mean more Kiwis look to buy direct offshore investments rather than using pie funds or before they start to invest into a pie fund.”
He said it was likely to change investor behaviour. “What doubling of the threshold means is more volume going directly overseas so it’s a bit of a challenge now again for our local stock market because what this has done is made it more attractive to invest globally.”
Robyn Walker, a tax expert at Deloitte, said the change would be welcome. “That current threshold was set in 2000. Doubling of the threshold to $100,000 is definitely a good start to make sure not too many taxpayers are subject to the rules because they are quite compliance cost-heavy.
“A lot of the time, if you’re investing through Sharesies or something, if you’re going through a managed fund, they might take care of the actual tax consequences for you. But if you’re investing directly Inland Revenue has … vastly increased the amount of data that they’re getting from other revenue authorities. So they know who’s invested in what, and they’re proactively contacting people to make sure that things are being put in their tax return.
“But the calculations aren’t necessarily straightforward. People don’t necessarily like them because it results in tax, which doesn’t match cash flow. You’re not being taxed on dividends received, you’re being taxed on the growth and the value of the shares. So it is problematic for people in funding the tax unless they’re prepared to sell the shares in order to pay the tax.”
She said new migrants would qualify for a “tax holiday” for four years but at the end of that, they discovered the financial consequences and it sometimes made them rethink a decision to live here.
“The concern has not been the need to pay tax, but rather the way the FIF rules calculated tax.”
Rupert Carlyon, founder of Koura KiwiSaver.
Photo: Supplied
Rupert Carlyon, founder of Koura Wealth, said the change was welcome but questioned why the separate regime was still necessary.
“It doesn’t solve the problem which was people coming to New Zealand want to be able to remain investing in their home countries. They’ve still got business offshore, they’ve still got assets offshore they want to retain. The problem has not been solved because those assets are significantly larger than $100,000.”
‘Ute tax’ rethink
The other change is in relation to fringe benefit tax.
Walker said it seemed that New Zealand was going to end up with a much simpler FBT regime for motor vehicles.
“The crux of the proposal should be to ditch the existing rules – which impose significant compliance costs and provide potential exemptions based on what type of vehicle is driven, leading to a preferences toward utes – and to instead look at how the vehicle is used to determine the eligibility for an exemption.
“Gone will be the days of filling out detailed logbooks. Vehicles, whether they are a ute, or an electric vehicle (EV), should have tax applied based on the level of private use rather what the vehicle looks like. The existing FBT rules provide a disincentive for businesses using EVs, so this reform has the potential to materially reduce the cost of EVs for businesses. In the medium term, this will have flow on benefits for households as there will be an increased number of EV’s moving into the secondary market as corporate vehicle fleets are refreshed.”
She said the fiscal cost of the changes was modest, so people were likely to continue to pay similar amounts of tax, but there would be less compliance cost in doing so.
Deloitte tax partner Robyn Walker.
Photo: Supplied / Deloitte
“Part of the reason for prioritising this reform is a widespread belief that many taxpayers are not currently correctly complying with the existing law because of its complexity and misconceptions that all utes automatically qualify for an exemption. The approach of simplifying the rules is also expected to result in more active policing that the rules are being followed.”
She said it was throwing out the existing rules and starting with a fresh piece of paper.
“What people will do is they will categorise their car and it will go into sort of one of six different categories depending on how the vehicle’s actually used. And it will either be subject to full FBT if it’s effectively a perk car that is available for private use all the time through to having no FBT if it is a business car only and there is very limited private use. Currently, the existing exemption for work-related vehicles that gets you out of FBT is quite limited to utes.
“What these rules will say is it doesn’t matter what the vehicle is, it’s just about how the vehicle is used. And so that’s like a real improvement in terms of not having an incentive to buy a particular type of car. Any type of car, in particular electric vehicles … will be able to be exempt from tax potentially, which is a positive move in terms of making those vehicles more cost effective because the fringe benefit tax is quite high on them if they get taxed.
“And then that will have flow on effects to the secondary market because if you’ve got lots of large employers with large fleets of vehicles, turning them over like every few years, then that gets a lot of electric vehicles out for, you know, mums and dads and regular people to buy as secondhand EV.
“If it does end up being subject to FBT, there’s … new calculation formulas and so that will change depending on whether it’s a standard petrol diesel car or if it’s hybrid or if it’s electric vehicles. So you will be paying less FBT on an electric vehicle going forward compared to what you currently are.”
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