FIF Tax Explained Guide

📝 The Threshold and the Methods

The De Minimis Threshold

The rules do not apply to everyone. If the total original cost of all your attributing foreign investments is below a de minimis threshold, you are outside the FIF rules and simply pay tax on any actual dividends, like a domestic share. Crucially, the threshold is based on what you paid (your cost), not the current market value, so a portfolio that has grown can still be under the threshold.

Key Points on the Threshold:

• Based on the original NZD cost of your foreign investments, not their current value
• Below it: FIF rules do not apply; you are taxed on actual dividends only
• Above it: you must use a FIF method
• It applies to individuals and certain trusts

The Main Methods

Above the threshold, the most common method is the Fair Dividend Rate (FDR): your taxable FIF income is deemed to be a set percentage of the market value at the start of the tax year, regardless of whether the investment paid a dividend or rose in value. The comparative value (CV) method instead taxes the actual change in value over the year plus any distributions. Individuals can usually choose the lower of FDR and CV each year, which helps in a year where investments fell.

Exemptions and Practicalities

Not every foreign holding is caught. Certain Australian-listed shares are exempt, and the rules have particular treatment for different investment types. Many investors hold global shares through NZ-domiciled PIE funds, which handle the FIF calculations for you at your PIR. The rules are complex, so significant foreign portfolios usually warrant tax advice.

🤔 Common Misunderstandings About FIF

Misconception 1: "I only pay tax on dividends I receive"

Reality: Above the threshold, FIF rules can tax a deemed income even when no dividend is paid. It is not just about cash received.

Misconception 2: "The threshold is based on what my shares are worth now"

Reality: The de minimis threshold is based on the original cost of your foreign investments, not their current market value.

Misconception 3: "FDR taxes my actual profit"

Reality: FDR taxes a deemed percentage of your opening value, regardless of actual gains or dividends. Comparative value taxes the actual change instead.

Misconception 4: "All foreign shares are caught"

Reality: Some investments, notably certain Australian shares, are exempt, and holdings below the threshold are outside the rules.

Misconception 5: "I am stuck with one method"

Reality: Individuals can usually choose the lower of FDR and CV each year, which helps in a poor year for the investments.

Misconception 6: "FIF does not affect everyday investors"

Reality: Many ordinary investors with global shares or ETFs cross the threshold. Often a PIE fund handles it, but direct holders may need to apply the rules themselves.