Investing Overseas? Have loans overseas? You may want to consider the tax consequences.
With all of us having found spare time recently (due to a certain global pandemic), term deposit rates at an all time low and the talk of negative interest rates intensifying you may be considering investing your cash elsewhere, in equities perhaps. You would not be the only one, there is a global movement of money from debt to equity as people look to maximise the rate of returns in these times of uncertainty.
In New Zealand, investment providers such as Sharesies and Hatch have made investing in equities and equity based instruments overseas (specifically, the US market) more popular among the masses through the revolutionary tactic of fractional investing; allowing for the purchase of portions of one share rather than buying whole shares which can be a costly exercise and which has put off people from shares in the past.
You may have heard that there are no capital gains taxes in New Zealand, so any capital gains in shares are not taxable so long as you are buying them for long term investment purposes. That is not necessarily the case when you are investing in foreign markets as a NZ Tax resident. These two rules often trip up unknowing investors into overseas markets, whether they be debt or equity based.
Financial Arrangement Rules (FA)
If you have a loan or mortgage overseas, have foreign currency bank accounts or foreign currency term deposits, you may be subject to these rules. There are three main exclusions from these rules, they are:
Bank accounts where the principal of the loan/deposit is valued less than $50,000 NZD.
Loan in a foreign currency where the borrower is a cash basis person, and the loan is used for private purposes.
Where there are direct investments, i.e. no mutual funds, PIE’s, and unit trust investments. In these cases, FIF rules may apply.
If this neither of these apply you will have to return any income derived from your investment in your tax return, either on a cash or accrual basis.
If your investment(s) has an absolute value of $1,000,000 NZD or less or the income/expenses derived from the investment has an absolute value of $100,000 NZD or less then you are on a cash basis and only income derived from the investment is required to be returned. Any capital gain/loss on foreign exchange is accounted for when the investment matures or when its realised.
*Note that absolute value means the sum, so if you have a loan worth $800,000 and foreign currency term deposit of $400,000, the absolute value of your investment is $1,200,000.
Now most people reading this are going to be cash basis persons if not exempt already. However, you may be wondering what if the absolute value of my foreign currency investments is worth more than $1,000,000 NZD?
In that case you have to declare your income on an accrual basis, so any unrealised foreign exchange movements must be included as either interest income or interest expense on your tax return depending on strength of New Zealand dollar.
Foreign investment fund rules (FIF)
If you have invested in foreign shares, FIF superannuation held as a beneficiary, right to benefit from a foreign life insurance policy and the value of your investment portfolio is below $50,000 NZD and you are investing in your own name or in some cases through estates, then you are exempt from these rules, if not then you are liable to report FIF income on your tax return.
The methods of calculation of FIF income are specified in the Income Tax Act 2007. They are complicated and if you believe you are caught by these rules, I strongly suggest you contact a tax advisor. In essence if your investment portfolio has a readily available market value your FIF income will be 5% of your capital gain whether you have sold a part or all of the shares or not, with capital losses generally not deductible.
Final comments
Now for most of us these rules will not apply, but there are a lot of investment intermediaries providing easy access to overseas markets, and with equities trending upward a small overseas portfolio can easily cross the $50,000 mark within a year, just on the capital gain and foreign exchange movements.
You can envisage a person investing for example $20,000 NZD in Tesla stock (TSLA) back in April; this investment would be worth close to $60,000 based on today’s stock price (28 August 2020). Now they suddenly find themselves in an awkward position of having to pay tax on the capital gain even if the value drops below the $50,000 mark later on in the year.