When it comes to tax, investment portfolios can be complex and can cause headaches if not structured properly. Sam Grice from Ashton Wheelans discusses some common types of tax and the implications for an investment portfolio.

NZ Interest & Dividends

New Zealand Interest and dividends tend to be two of the more common forms of income earned by New Zealand portfolios and compared to foreign income the income recognition rules and tax credit application, tend to be more straightforward. Payers of New Zealand Dividends and Interest are required to withhold tax before making payment to the investor, this tax is known as Resident Withholding Tax, or RWT for short. RWT is paid to Inland Revenue on your behalf and included in your income tax return and utilised against any tax payable. Any withholding tax above your tax liability can be refunded to you.

Dividends also have another tax credit, Imputation Credits, or ICs. Imputation credits are a tax credit investors receive from companies when they pay a dividend. ICs reflect tax that the company has already paid and is designed to prevent the investor from being taxed twice, once at the corporate level and again when they receive the dividend. An investor can use the imputation credit to reduce the income tax they have to pay on some or all of the dividends they have received from the company. Surplus ICs are not refundable, however, they can either be carried forward to the next tax year or converted to a loss and then carried forward to the next tax year, depending on the type of entity that owns the shares.

In most cases, if the correct RWT rate has been selected by the investor, there will be no further tax due, an exception to this is if the investor falls into the 39% tax bracket. A further income tax payment will be required when they file their tax return.

Foreign Income

Foreign income is slightly more complex. Generally speaking, most foreign income in an investment portfolio will fall into the Foreign Investment Fund scheme. A foreign investment fund (FIF) is an offshore investment that is:
• a foreign company,
• a foreign unit trust, or
• a foreign superannuation scheme

FIF income is not treated like other types of income, taxable income is not triggered when the taxpayer receives the income, instead taxable income is determined by applying one of the five IRD prescribed calculation methods, with the two most common methods being:
• The Comparative Value Method (CV)
• The Fair Dividend Rate Method (FDR)

In some situations, taxable income could be earned before an investor actually receives any money. Most managed portfolios will automatically calculate FIF income, it is up to the taxpayer to select the correct and most tax efficient method. Selecting the wrong method can significantly increase the taxpayer’s income tax exposure. Failure to disclose FIF income can result in harsh penalties from Inland Revenue, so it’s important that the taxpayer returns the correct information.

There are some exemptions to the FIF scheme, the main ones being:
• Dividend income earned from ASX listed companies. Dividend income is recognized when you earn it.
• If the taxpayer holds an interest in a company greater than 10%, (another set of rules are applicable),
• If the taxpayer’s total investments in overseas companies or managed funds is less than $50,000

Should an exemption apply, the taxpayer, in most cases is to recognise taxable income when it is received. Tax credits are also claimable when returning FIF income.

Foreign tax credits, if not used in the tax year they are paid expire, they are non-refundable, and you cannot carry surplus foreign tax credits into the next tax year. There are also specific rules which limit the amount of foreign tax credits a taxpayer can claim, depending on the segment of foreign sourced income. Specific advice from a professional is advised.

Tax Deductions

Like many trading businesses, certain expenses related to earning income can be deducted from your taxable income, such as portfolio management fees charged by HHG. Accountancy fees are also specifically deductible under tax law.

Sam Grice and the team at Ashton Wheelans would love to hear from you if you have any questions about your tax requirements, or if you would like an independent review of your ownership structure.