How the numbers work: tax on investments and property

When Do FIF Rules Apply?

1. Example:
2. US shares (cost): $30,000
3. UK shares (cost): $15,000
4. Total: $45,000

Below $50,000 → FIF rules don't apply

Method 1: Fair Dividend Rate (FDR) - Most Common

1. FIF Income = Opening Market Value × 5%
2. Plus: Actual dividends received (taxed separately)
3. Note: Capital gains/losses are ignored

Method 1: Fair Dividend Rate (FDR) - Most Common

1. Opening value (1 April): $100,000
2. Closing value (31 March): $115,000
3. Dividends received: $2,000
4. Actual return: $15,000 + $2,000 = $17,000 (17%)
5. FDR Calculation:
6. FIF income: $100,000 × 5% = $5,000
7. Dividend income: $2,000

Total taxable: $7,000 (not the actual $17,000)

Method 2: Comparative Value (CV)

1. CV Income = (Closing Value - Opening Value) + Distributions - Contributions

Method 2: Comparative Value (CV)

1. Opening value: $100,000
2. Closing value: $95,000
3. Dividends: $2,000
4. Additional purchases: $0
5. CV Calculation:
6. ($95,000 - $100,000) + $2,000 - $0
7. Tax payable: $0 (loss carried forward)

= -$3,000 (loss)

Method 4: Cost Method (CM)

1. FIF Income = Actual distributions received
2. Capital gains/losses = Ignored

FDR Method: Step-by-Step

1. FIF Income = Opening Market Value × 5%

FDR Method: Step-by-Step

1. Total FIF Income = (Opening Value × 5%) + Dividends
2. Tax Payable = Total FIF Income × Your Tax Rate

FDR Method: Step-by-Step

1. Investment in US S&P 500 ETF:
2. Opening value (1 April): US$80,000
3. Exchange rate: NZ$1.65 per US$
4. Opening value NZD: US$80,000 × 1.65 = NZ$132,000
5. FDR Income:
6. NZ$132,000 × 5% = NZ$6,600
7. Dividends:
8. Received during year: US$2,000 = NZ$3,300
9. US withholding tax (15%): NZ$495
10. Total Taxable Income:
11. FIF income: NZ$6,600
12. Dividend income: NZ$3,300
13. Tax Calculation (33% rate):
14. NZ$9,900 × 33% = NZ$3,267
15. Less foreign tax credit: -NZ$495

Total: NZ$9,900

CV Method: Step-by-Step

1. CV Income = Closing Value - Opening Value + Distributions - Contributions

CV Method: Step-by-Step

1. European Shares (Market Crash Year):
2. Opening value (1 April): NZ$100,000
3. Closing value (31 March): NZ$75,000
4. Dividends received: NZ$1,500
5. Additional purchases: NZ$0
6. CV Calculation:
7. (NZ$75,000 - NZ$100,000) + NZ$1,500 - NZ$0
8. = -NZ$25,000 + NZ$1,500
9. Tax Impact:
10. Tax payable: $0
11. Loss carried forward: NZ$23,500
12. Can offset against future FIF income from same investment

= -NZ$23,500 (loss)

CV Method: Step-by-Step

1. UK Investment Trust (Growth Year):
2. Opening value: NZ$80,000
3. Closing value: NZ$92,000
4. Dividends: NZ$2,400
5. Additional purchase (July): NZ$10,000
6. CV Calculation:
7. (NZ$92,000 - NZ$80,000) + NZ$2,400 - NZ$10,000
8. = NZ$12,000 + NZ$2,400 - NZ$10,000
9. Tax (33% rate):

= NZ$4,400 FIF income

Exchange Rate Considerations

1. Investment value: US$50,000 (unchanged)
2. 1 April rate: NZ$1.60 per US$ → NZ$80,000
3. 31 March rate: NZ$1.70 per US$ → NZ$85,000
4. CV Method:
5. NZ$85,000 - NZ$80,000 = NZ$5,000 FIF income
6. Even though US$ value didn't change!

🔢 Real-World Examples

1. Investment: Vanguard S&P 500 ETF (US-listed)
2. Opening value (1 April): NZ$120,000
3. Closing value (31 March): NZ$135,000
4. Actual gain: NZ$15,000 (12.5%)
5. Dividends received: NZ$3,200
6. US withholding tax paid: NZ$480

Who this happens to, and what it meant for them

🔢 Real-World Examples

1. FIF Income (FDR):
2. NZ$120,000 × 5% = NZ$6,000
3. Dividend Income:
4. NZ$3,200
5. Total FIF Income:
6. Tax (33% rate):
7. NZ$9,200 × 33% = NZ$3,036
8. Less US tax credit: -NZ$480

NZ$6,000 + NZ$3,200 = NZ$9,200

🔢 Real-World Examples

1. If CV method was used instead:
2. CV income: NZ$15,000 + NZ$3,200 = NZ$18,200
3. Tax at 33%: NZ$6,006
4. Less US credit: -NZ$480
5. CV tax: NZ$5,526

FDR saved Jane: NZ$5,526 - NZ$2,556 = NZ$2,970

1. Investment: European stock portfolio
2. Opening value: NZ$80,000
3. Closing value: NZ$70,000
4. Actual loss: NZ$10,000 (-12.5%)
5. Dividends received: NZ$1,500

Who this happens to, and what it meant for them

1. CV Calculation:
2. (NZ$70,000 - NZ$80,000) + NZ$1,500 - NZ$0
3. = -NZ$10,000 + NZ$1,500
4. Tax Impact:
5. Current year tax: $0
6. Loss carried forward: NZ$8,500

= -NZ$8,500 (loss)

1. Next year, if portfolio recovers:
2. Opening: NZ$70,000
3. Closing: NZ$80,000
4. Dividends: NZ$1,500
5. CV income: NZ$10,000 + NZ$1,500 = NZ$11,500
6. Less carried forward loss: -NZ$8,500
7. Tax: NZ$3,000 × 33% = NZ$990

Net FIF income: NZ$3,000

1. Opening value: NZ$100,000
2. Closing value: NZ$108,000
3. Gain: NZ$8,000 (8%)
4. Dividends: NZ$1,000

Who this happens to, and what it meant for them

1. FIF income: NZ$100,000 × 5% = NZ$5,000
2. Dividend income: NZ$1,000
3. Total: NZ$6,000
4. Tax (33%): NZ$6,000 × 0.33 = NZ$1,980

After-tax return: NZ$9,000 - NZ$1,980 = NZ$7,020

1. CV income: (NZ$108,000 - NZ$100,000) + NZ$1,000
2. = NZ$9,000
3. Tax (33%): NZ$9,000 × 0.33 = NZ$2,970

After-tax return: NZ$9,000 - NZ$2,970 = NZ$6,030

1. NZ$7,020 vs NZ$6,030 after-tax return

FDR is better: Saves NZ$990 in tax

1. FIF income: $60,000 × 5% = $3,000
2. Dividends: $800
3. Total: $3,800

Who this happens to, and what it meant for them

1. FIF income: $45,000 × 5% = $2,250
2. Dividends: $1,200
3. Total: $3,450

1. FIF rules don't apply (ASX exemption)
2. Tax only on dividends received: $1,600
3. No FIF income attributed

1. FIF Income:
2. US: $3,800
3. UK: $3,450
4. Total FIF: $7,250
5. Other Income:
6. Australian dividends: $1,600
7. Total Foreign Income:
8. Tax (33%): $2,921
9. Less foreign tax credits: -$420

$7,250 + $1,600 = $8,850

1. US ETF (cost): $28,000
2. European fund (cost): $20,000
3. Total cost: $48,000

Who this happens to, and what it meant for them

1. US ETF current value: $35,000
2. European fund current value: $23,000
3. Total market value: $58,000

1. FIF rules: Don't apply
2. Tax on: Dividends received only
3. Dividends received: $1,800
4. Tax (33%): $594
5. No FIF income attributed

1. After $10,000 additional investment:
2. New total cost: $48,000 + $10,000 = $58,000
3. From that tax year onwards, Emma must:
4. • Calculate FIF income using FDR or CV
5. • Keep detailed records
6. • Complete IR3 return

$58,000 > $50,000 threshold ✗ FIF rules now apply

CV Method Formula

1. FIF Income = (Closing Value - Opening Value) + Distributions
2. Where:
3. Closing Value = Market value at 31 March (year end)
4. Opening Value = Market value at 1 April (year start)
5. Distributions = Dividends, distributions received during year

Simple CV Method Example

1. Opening value (1 April 2024): NZD $120,000
2. Closing value (31 March 2025): NZD $145,000
3. Dividends received: NZD $4,500
4. Capital gain: $145,000 - $120,000 = $25,000
5. FIF income: $25,000 + $4,500

FIF Income = $29,500

Advantages of CV Method

1. Opening: $100,000, Closing: $85,000
2. Loss: $15,000
3. Can offset against other income

Market Value Determination

1. Use IRD's published exchange rates for 1 April and 31 March
2. Or use actual rates from reputable source (bank)

Example 1: Basic Full-Year Holding

1. 1 April 2024: 500 units at USD $420 = USD $210,000
2. Exchange rate 1 April: 0.60 (NZD/USD)
3. Opening value NZD: $210,000 ÷ 0.60 = $350,000

Example 1: Basic Full-Year Holding

1. 31 March 2025: 500 units at USD $465 = USD $232,500
2. Exchange rate 31 March: 0.58 (NZD/USD)
3. Closing value NZD: $232,500 ÷ 0.58 = $400,862

Example 1: Basic Full-Year Holding

1. Dividends received: USD $5,250
2. Average rate: 0.59
3. Dividends NZD: $5,250 ÷ 0.59 = $8,898

Example 1: Basic Full-Year Holding

1. Capital gain: $400,862 - $350,000 = $50,862
2. Plus dividends: $8,898

Total FIF Income: $59,760

Example 2: Mid-Year Purchase

1. No holdings at 1 April 2024 (opening value: $0)
2. Purchased 15 October 2024: USD $75,000
3. Exchange rate: 0.62
4. Cost NZD: $75,000 ÷ 0.62 = $120,968

Example 2: Mid-Year Purchase

1. 31 March 2025 value: USD $82,000
2. Exchange rate: 0.58
3. Closing value NZD: $82,000 ÷ 0.58 = $141,379

Example 2: Mid-Year Purchase

1. Closing value: $141,379
2. Cost: $120,968
3. FIF income: $141,379 - $120,968

FIF Income: $20,411

Example 3: FIF Loss

1. Opening value 1 April: $200,000
2. Closing value 31 March: $165,000
3. Dividends: $3,000
4. Capital loss: $165,000 - $200,000 = -$35,000
5. Plus dividends: $3,000

FIF Income: -$32,000 (Loss)

Example 5: CV vs FDR Comparison

1. Opening value: $150,000
2. Closing value: $168,000
3. Dividends: $2,500

Example 5: CV vs FDR Comparison

1. FIF income = ($168,000 - $150,000) + $2,500
2. Tax at 33%: $6,765

= $20,500

Example 5: CV vs FDR Comparison

1. FIF income = $150,000 × 5%
2. Tax at 33%: $2,475

= $7,500

Handling Transactions During Year

1. Opening: $100,000
2. Bought more (Oct): $30,000
3. Closing: $145,000
4. Gain: $145,000 - ($100,000 + $30,000) = $15,000

Handling Transactions During Year

1. Opening: $100,000
2. Sold portion (Dec): $25,000 (proceeds)
3. Closing: $80,000 (remaining)
4. Total value: $80,000 + $25,000 = $105,000
5. Gain: $105,000 - $100,000 = $5,000

🌍 Real-World CV Method Examples

1. Opening 1 April 2024: NZD $280,000
2. Closing 31 March 2025: NZD $385,000
3. Dividends: NZD $8,400

Who this happens to, and what it meant for them

🌍 Real-World CV Method Examples

1. Capital gain: $385,000 - $280,000 = $105,000
2. Plus dividends: $8,400
3. FIF income: $113,400
4. Tax at 39%: $44,226

🌍 Real-World CV Method Examples

1. FIF income: $280,000 × 5% = $14,000
2. Tax at 39%: $5,460

FDR saves $38,766 in tax!

🌍 Real-World CV Method Examples

1. Opening 1 April 2023: NZD $320,000
2. Closing 31 March 2024: NZD $280,000
3. Dividends: NZD $6,800

Who this happens to, and what it meant for them

🌍 Real-World CV Method Examples

1. Capital loss: $280,000 - $320,000 = -$40,000
2. Plus dividends: $6,800
3. FIF income: -$33,200 (Loss)
4. Tax saving at 39%: $12,948

🌍 Real-World CV Method Examples

1. FIF income: $320,000 × 5% = $16,000
2. Tax at 39%: $6,240

CV saves $19,188 vs FDR!

🌍 Real-World CV Method Examples

1. Holdings: USD $150,000 (unchanged all year)
2. 1 April rate: 0.65 NZD/USD
3. Opening NZD: $150,000 ÷ 0.65 = $230,769
4. 31 March rate: 0.60 NZD/USD (NZD stronger)
5. Closing NZD: $150,000 ÷ 0.60 = $250,000

Who this happens to, and what it meant for them

1. Capital gain: $250,000 - $230,769 = $19,231
2. Dividends: $0

FIF Income: $19,231

1. Always using FDR: Total income $58K
2. Always using CV: Total income $60K
3. Strategic switching: Total income $21.75K

Saves $36.25K income (or $11,963 tax at 33%)

Who this happens to, and what it meant for them

CGT Calculation Example

1. Purchase price: $600,000
2. Sale price: $780,000
3. Capital gain: $180,000
4. Your marginal tax rate: 33%
5. Tax on gain: $180,000 × 33%

Tax owed: $59,400

CGT Calculation Example

1. Purchase price: $600,000
2. Legal fees (purchase): $2,000
3. Renovations: $40,000
4. Real estate commission: $18,000
5. Legal fees (sale): $2,000
6. Total cost base: $662,000
7. Sale price: $780,000
8. Taxable gain: $118,000
9. Tax at 33%: $38,940

Example 1: Rental Property (Bright-Line)

1. Property price: $550,000
2. Legal fees: $1,800
3. Total cost: $551,800

Example 1: Rental Property (Bright-Line)

1. New kitchen: $25,000
2. Bathroom renovation: $15,000
3. Heat pump: $4,000
4. Total improvements: $44,000

Example 1: Rental Property (Bright-Line)

1. Sale price: $720,000
2. Real estate commission: $21,600
3. Legal fees: $2,000
4. Net sale proceeds: $696,400

Example 1: Rental Property (Bright-Line)

1. Net sale proceeds: $696,400
2. Less: Original cost: $551,800
3. Less: Improvements: $44,000
4. Taxable capital gain: $100,600
5. Tax at 33% marginal rate: $33,198
6. Tax at 39% marginal rate: $39,234

Example 2: Share Portfolio Trading

1. Total gains: $2,500 + $4,000 = $6,500
2. Total losses: $1,200
3. Net taxable income: $5,300
4. Tax at 33%: $1,749

Example 3: Main Home Partial Exemption

1. Purchase price: $450,000
2. Sale price: $650,000
3. Total gain: $200,000
4. Lived in: 4 years / 6 years = 66.7%
5. Exempt portion: $200,000 × 66.7% = $133,400
6. Taxable portion: $200,000 × 33.3% = $66,600
7. Tax at 33%: $21,978

Example 4: Cryptocurrency Trading

1. Bought Bitcoin: $30,000 (Jan 2024)
2. Sold Bitcoin: $42,000 (Mar 2024)
3. Gain: $12,000
4. Bought Ethereum: $20,000 (Apr 2024)
5. Sold Ethereum: $18,500 (Jun 2024)
6. Loss: $1,500
7. Net taxable gain: $10,500
8. Tax at 33%: $3,465

Tax Planning Strategies

1. $100,000 gain while earning $180,000 salary = 39% tax
2. $100,000 gain while earning $50,000 salary = 30% tax
3. Tax saving: $9,000

Tax Planning Strategies

1. Property gain: $150,000
2. Share trading loss: $20,000
3. Net taxable: $130,000

🌍 Real-World CGT Scenarios

1. Property A gain: $120,000 (taxable)
2. Property B gain: $130,000 (taxable)
3. Property C: $160,000 (tax-free, held >10 years)
4. Total taxable: $250,000
5. Tax at 39%: $97,500

Who this happens to, and what it meant for them

🌍 Real-World CGT Scenarios

1. Purchased large section: $800,000 (2021)
2. Subdivision costs: $150,000
3. Total cost: $950,000
4. Sold 3 sections (2024):
5. Section 1: $450,000
6. Section 2: $480,000
7. Section 3: $520,000
8. Total: $1,450,000

Who this happens to, and what it meant for them

🌍 Real-World CGT Scenarios

1. Total gain: $500,000
2. IRD view: Land development = taxable
3. Tax at 39%: $195,000

1. Bought/sold NZ shares 50 times in year
2. Net profit: $45,000
3. IRD view: Trading = business income
4. Tax at 33%: $14,850

Who this happens to, and what it meant for them

1. Bought NZ shares in 2015
2. Sold in 2024, profit: $45,000
3. IRD view: Investment, not trading
4. Tax: $0 (NZ shares, long-term)

1. Bought: $650,000 (March 2022)
2. Sold: $850,000 (March 2026, 4 years)
3. Gain: $200,000
4. Within 10-year bright-line

Who this happens to, and what it meant for them

1. Lived in as main home: 100% of ownership
2. Main home exemption applies
3. Tax: $0

1. Lived in: 2 years, Rented: 2 years
2. Main home for 50% of ownership
3. Exempt: $100,000, Taxable: $100,000
4. Tax at 33%: $33,000

DRR Method Formula

1. FIF Income = Total Distributions Received
2. Where:
3. Distributions = Dividends, interest, other distributions in NZD
4. Capital gains = Ignored
5. Capital losses = Ignored

Simple DRR Example

1. Investment value: $100,000 (irrelevant for DRR)
2. Dividends received: $7,500

FIF Income = $7,500

Example 1: High Dividend Stock

1. Investment: UK dividend stock
2. Dividends received: GBP £4,200
3. Exchange rate (average): 0.50
4. Dividends NZD: £4,200 ÷ 0.50 = $8,400

FIF Income = $8,400

Example 2: REIT Investment

1. US REIT value: $150,000 (not used in calc)
2. Quarterly distributions:
3. Q1: $2,100, Q2: $2,250, Q3: $2,200, Q4: $2,150
4. Total: $8,700

FIF Income = $8,700

Example 2: REIT Investment

1. FDR would tax: $150,000 × 5% = $7,500
2. DRR taxes: $8,700
3. DRR worse by $1,200 income
4. But yield is 5.8%, close to FDR 5% threshold

Example 3: Zero Dividend Growth Stock

1. Tesla stock: $80,000 value
2. Dividends: $0 (Tesla pays no dividend)

Cannot use DRR (no distributions)

🌍 Real-World DRR Examples

1. Total REIT portfolio: $300,000
2. Average yield: 6.5%
3. Annual distributions: $19,500
4. FIF Income (DRR): $19,500
5. Tax at 33%: $6,435

Who this happens to, and what it meant for them

🌍 Real-World DRR Examples

1. FIF Income: $300,000 × 5% = $15,000
2. Tax: $4,950

FDR saves $1,485

🌍 Real-World DRR Examples

1. Tech growth portfolio: $250,000
2. Yield: 1.2%
3. Distributions: $3,000
4. DRR income: $3,000
5. FDR income: $12,500

DRR better (saves $9,500 taxable income)

Who this happens to, and what it meant for them

Cost Method Formula

1. FIF Income = (Closing Value - Cost of Acquisition) + Distributions
2. Where:
3. Closing Value = Market value at 31 March (year end)
4. Cost = Purchase price + transaction costs in NZD
5. Distributions = Dividends received after purchase

Simple Example

1. Purchase date: 15 October 2024
2. Cost: USD $50,000
3. Exchange rate: 0.62 NZD/USD
4. Cost NZD: $50,000 ÷ 0.62 = $80,645
5. 31 March 2025 value: USD $54,500
6. Exchange rate: 0.58
7. Closing NZD: $54,500 ÷ 0.58 = $93,966
8. Dividends NZD: $850
9. FIF income = ($93,966 - $80,645) + $850

= $14,171

Example 1: Purchase Early in Year

1. Purchased: 10 April 2024 (day after year start)
2. Cost: $75,000 NZD
3. 31 March 2025: $82,000 NZD
4. Dividends: $1,200
5. FIF income = ($82,000 - $75,000) + $1,200 = $8,200

Example 2: Purchase Late in Year

1. Purchased: 28 February 2025 (1 month before year end)
2. Cost: $100,000 NZD
3. 31 March 2025: $101,500 NZD
4. Dividends: $0 (too soon)
5. FIF income = $101,500 - $100,000 = $1,500

Example 3: Multiple Purchases Same Year

1. 31 March 2025 value: $85,000
2. Dividends: $2,100
3. FIF income = ($85,000 - $75,000) + $2,100 = $12,100

🌍 Real-World Examples

1. Purchased Vanguard ETF: September 2024
2. Cost USD $80,000 = NZD $128,000
3. 31 March value: USD $86,000 = NZD $145,000
4. Dividends: NZD $2,800
5. FIF income = ($145,000 - $128,000) + $2,800 = $19,800
6. Tax at 33%: $6,534

Who this happens to, and what it meant for them

🌍 Real-World Examples

1. Purchased: November 2024, Cost $90,000
2. Market crash by 31 March: $78,000
3. Dividends: $1,500
4. FIF income = ($78,000 - $90,000) + $1,500 = -$10,500
5. Loss reduces other taxable income by $10,500

Who this happens to, and what it meant for them

Why the Rule Exists

1. Property speculator buys property
2. Holds briefly, makes improvements, sells at significant profit
3. Claims no speculative intention - "circumstances changed"
4. IRD must prove intention to speculate (nearly impossible)
5. Speculator pays no tax despite clear profit-seeking behaviour

The Main Home Exclusion Explained Simply

1. Scenario: You buy property, live in it as main home, later convert to rental, then sell within bright-line period
2. Period lived in as main home: Protected from bright-line tax
3. Period used as rental: May be subject to bright-line tax
4. Result: Partial exemption - apportioned based on use periods

Why Keeping Records Matters

1. Without main home evidence: IRD may reject your exemption claim
2. Result: Tax liability on sale you believed was exempt
3. Without improvement cost receipts: Gain calculated ignoring expensive improvements
4. Result: Higher taxable gain than reality, substantially more tax owed
5. Prevention: Keep everything from purchase to sale completion

You Are Taxed on the Profit

1. Rent received over the year
2. Less allowable expenses
3. Equals net rental profit (or loss)
4. The profit is added to your other income and taxed at your rate

Ring-Fencing of Rental Losses

1. Rental makes a $5,000 loss this year
2. You cannot deduct it from your salary income
3. The loss carries forward
4. It offsets rental profit in a future year

A Simple Landlord Checklist

1. 1. Record all rent received
2. 2. Keep invoices and split repairs from improvements
3. 3. Confirm the current interest deductibility rules
4. 4. Treat any loss as ring-fenced and carried forward
5. 5. Include the net profit in your return and get advice if unsure

What is the FDR Method?

1. Opening market value of foreign investments on 1 April (start of tax year)
2. FDR income = Opening value × 5%
3. This FDR income added to your assessable income
4. Taxed at your marginal tax rate
5. Applies regardless of actual returns (gain, loss, or no change)