Australian Shares From New Zealand: Franking Credits and the FIF Carve-Out
Australian shares occupy an unusual position for a New Zealand investor. They get a generous exemption from the foreign investment fund rules that no other country's shares receive, which is genuinely valuable. And they come with a tax credit attached to their dividends that a New Zealander cannot use at all, which is a genuine cost. Most people know about one of these and not the other.
Getting both into view at once changes how an Australian holding looks. The exemption means you are taxed on dividends rather than on a notional 5% of your holding's value, which is usually much better. The franking credit you cannot claim means those dividends are worth materially less to you than to the Australian sitting next to you on the share register.
The three things to remember
Shares in Australian-resident companies on an approved ASX index that must maintain a franking account are exempt from the FIF rules. Ordinary income tax rules then apply. And Australian franking credits cannot be claimed as tax credits in New Zealand.
An Australian company that has paid 30% company tax attaches a franking credit to its dividend. An Australian shareholder uses that credit against their own tax bill. A New Zealand shareholder cannot, so the Australian company tax is simply gone, and then New Zealand taxes the cash you receive on top. This is not a loophole to work around. It is a structural feature of holding Australian shares directly from here.
Two systems that do not talk to each other
Australia and New Zealand both use imputation, which is the idea that company tax already paid should not be charged again in the shareholder's hands. Both systems work well domestically. Neither recognises the other's credits for ordinary portfolio investors.
So a New Zealand resident holding Australian shares meets the worst part of both: Australian company tax has been paid on the profits, and New Zealand income tax is then charged on the dividend that survives it. There is a limited trans-Tasman imputation mechanism, but it applies to companies that elect into it and does not generally rescue an individual investor.
The Australian share exemption
Most foreign shares held by a New Zealander fall under the foreign investment fund rules, which tax a notional return rather than actual dividends. Australian shares are the major exception, but the exemption is narrower than "anything on the ASX" and it is worth knowing the conditions.
The practical shorthand is that a New Zealand investor receiving a franked dividend from a company on the All Ordinaries will generally qualify. Inland Revenue publishes a tool for checking a specific company, and it is worth using rather than assuming, because dual-listed companies and trusts are exactly the cases where the assumption fails.
What applies instead
Once exempt from FIF, ordinary income tax rules take over, and the answer then depends on whether you hold the shares on capital account or revenue account.
| How you hold them | What is taxed |
|---|---|
| Capital account, the ordinary long-term investor | Dividends only. Realised gains are not taxed. |
| Revenue account, where you acquired them to resell or you trade in shares | Dividends and realised share gains. |
That distinction is about your purpose when you acquired the shares, not about how long you happened to hold them. Someone who buys with the intention of selling at a profit is on revenue account from the outset, however patient they turn out to be.
An individual whose attributing interests in FIFs cost less than NZ$50,000 in total does not have to calculate income under the FIF rules at all. For a smaller portfolio that threshold may already resolve the question before the Australian exemption is even needed. The FIF de minimis calculator works out where you sit, and note that it is measured on original cost rather than current value.
What a franking credit actually costs you
The clearest way to see it is to follow $1,000 of Australian company profit through to two different shareholders.
Fully franked dividends paid to a non-resident are generally exempt from Australian dividend withholding tax, so at least there is no second layer of Australian tax on top. Where a dividend is unfranked or partly franked, Australian withholding tax can apply to the unfranked portion, at the rate set by the double tax agreement between the two countries. That withholding is creditable in New Zealand, unlike the franking credit.
An unfranked dividend can leave a New Zealand investor in a better relative position than a fully franked one, because the Australian withholding tax on it is creditable here while a franking credit is not. That is not a reason to seek out unfranked dividends, since the company paying them has usually not paid the tax that generated the frank. But it explains why the intuition that "fully franked is better" is an Australian intuition rather than a New Zealand one.
Australian shares held through a fund
Holding Australian shares inside a New Zealand PIE changes the calculation. The fund is taxed under the PIE rules and your rate is capped at your prescribed investor rate, a maximum of 28%, rather than your personal marginal rate of up to 39%. For someone on 33% or 39%, that difference can outweigh a good deal of the franking credit problem.
The dividend tax calculator shows the after-tax position on a given dividend, and the RWT and PIR guide covers choosing the right rate.
How this changes what to hold where
None of this means avoiding Australian shares. It means knowing which wrapper suits them.
There is a broader point here worth sitting with. Australian companies pay out a high share of earnings as dividends because their shareholders receive a credit for doing so. A New Zealand investor buying into that market is buying a payout policy designed for someone else's tax system. Recognising that is more useful than trying to engineer around it.
The FIF calculator works out whether the rules apply to your holdings and what they produce, and the FIF method comparison shows the difference between the calculation methods where they do apply. The FIF tax guide covers the wider rules that Australian shares are the exception to.
What this guide does not cover
Australian listed investment companies, stapled securities, real estate investment trusts and managed investment trusts often fall outside the exemption or have their own treatment, and dual-listed companies frequently fail the Australian residence test. Employee share schemes in Australian companies have separate rules again. Australian tax residents living in New Zealand, and anyone with a superannuation balance across the Tasman, have a different set of questions entirely. This is general information rather than tax advice.
Test Your Knowledge
Ten questions on holding Australian shares from New Zealand.
Sources: Inland Revenue on foreign investment fund rules exemptions and the Australian listed share exemption tool, Inland Revenue Tax Technical on the exemption for interests in an ASX-listed company, and the IR461 guide to foreign investment funds. Company tax rates, thresholds and treaty rates change; confirm the current position before relying on it.
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