Fair dividend rate (FDR)

Question

I am just a fairly steady investor and I guess, like many invest directly, locally with both shares and fixed interest but to get a good spread overseas I use managed investments. I am trying to follow the new tax rules and I see further comments in the media which seem to be a lot different from that previously proposed.

Can you shed any light please.

Answer

The Finance and Expenditure Select Committee (FESC) on 15 September announced further changes to the proposals with regard taxation of investments.

The previously suggested structures met with a huge wave of disapproval and the Minister has been forced to reconsider. A new recommendation is a ‘fair dividend rate (FDR)’.

Whether this is fair of not is yet to be seen and the stated objective,  ‘To put all those investing outside New Zealand and Australia – individuals and managed funds  - on a similar footing. The tax changes we are suggesting preserve these aims’. Yeh right - surprise, surprise this does not seem to have been achieved.

It is not really clear how this FDR will work, but it does seem to disadvantage managed fund investors compared with direct investors.

For those direct investors among us:

•  You will be taxed on a maximum of 5.00% of the value of international investment in a given year, with any dividends counting towards the 5.00%.
• If the return is less than 5.00%, you will be taxed at a lower rate and will not be taxed where there is a negative return.
• The proposed FDR has been based on long run historical returns which average around 8% [source not known].
• This regime continues to apply only to folk who have more than $50,000 invested internationally.

When and what do you pay:

• Total return is greater than 5% = tax is payable on 5% of the market value at the start of the income year.
• Total return is between 0 and 5% = tax is payable on the return multiplied by the market value at the beginning of the income year.
• Total return is negative = no tax is payable and loss not deductible.

The media statement is silent on how investors in international managed funds will be taxed except it says; ‘Managed funds could use a version of the FDR method that would tax 5.00% of the value of their offshore portfolio investments each year. There would be no variation to this rate, to provide certainty, and also to limit the potential fiscal cost.’

This looks remarkably like managed funds will be subject to a flat 5.00% rate, regardless of whether the investment performance is positive or negative.

This indicates that managed fund investors (including KiwiSaver) may not receive the same tax benefits as direct investors.  Introduction date remains 1st April 2007 and the Portfolio Investment Entity (PIE) date stays at 1st October 2007.

Why and how we managed to end up with this shambles can only be laid at the door of those folk we continue to blindly support with our vote three yearly – red, blue, black or green.

We reiterate that investors should ponder the new proposals, but not rush into any decisions until the final form is legislation – and worry about who to vote for in 2008.

Original Article published August 2006