From what I have seen on this sub, there seems to be a lot of questions around Foreign Investment Funds (FIFs) and the way that income is calculated.
I am providing what is hopefully a brief, simple and easy to understand guide below and is applicable to individual investors only.
This is also only a basic guide, for more complex situations a discussion with a professional may be warranted.
I hope this helps answer some basic questions people have about FIFs and the way they are treated for tax purposes.
How do I know if my investment is a FIF investment?
A FIF investment is an offshore investment that is either:
- A foreign company
- A foreign unit trust
- A foreign superannuation scheme
- An insurer under a foreign life insurance policy.
Am I required to make a FIF income calculation?
A De-Minimis exemption exists for Natural Persons (Individual Investors), if the total ~cost~ of your FIF investments does not exceed $50,000 during the year, you do not need to calculate FIF Income. Instead you just return the actual dividends received (if any) from the FIF investments. This amount can be $100,000 in the case of joint ownership as the $50,000 would then apply at an individual level.
Please note that the De-Minimis exemption only applies to ~individual~ investors, other entities (companies, trusts etc.) are required to calculate FIF Income regardless of the overall cost.
If your ~cost~ basis is >$50,000, then FIF income needs to be calculated.
Example:
Individual Investor A
Total ~Cost~ of FIF Investments: $45,000, Market Value: $60,000
Individual Investor B
Total ~Cost~ of FIF Investments: $55,000, Market Value: $40,000
Only Investor B would be required to make a FIF calculation as the De-Minimis exemption does not apply because their cost basis is >$50,000. Investor A could, however, elect to treat their investment as a FIF and return income under the FIF rules.
Another exemption that exists is for ASX-listed Australian Companies. It is important to note that there are some that are still regarded as a FIF Investment. You can check if an Australian investment is exempted via the IRD website:
https://www.ird.govt.nz/income-tax/...t-fund-australian-listed-share-exemption-tool
How do I calculate my FIF Income?
I am only going to discuss the two most popular methods for FIF Income calculation that would apply to 95% of people, the FDR (Fair-Dividend Rate) method and the CV (Comparative Value) method.
The calculation that provides the total lowest value would be used. The method you choose must be applied to all investments, you cannot ‘Cherry Pick’ based on what is lowest at an individual investment level.
1. FDR Method: 5% of the Market Value at the beginning of the tax year + Quick-sale Adjustment
The quick-sale adjustment is not discussed. The quick sale adjustment applies when a FIF investment is purchased and sold within the same tax year.
2. CV Method: Closing Market Value + Gains – Opening Market Value + Purchases
Example:
Investment Cost: $50,000
Market Value as at 1 April 2023: $45,000
Market Value as at 31 March 2024: $55,000
Dividend Issued: $500
FDR Method: 45,000 x 5% = $2,250
CV Method: 55,000 + 500 – 45,000 = $10,500
Assuming only this investment exists, the lowest value would be used, being the calculation under the FDR method. $2,250 would be returned as Income, the $500 dividend would be excluded income for income tax purposes.
The above calculations would be made for each of your FIF Investments.
If you end up with a negative value (loss), the loss cannot be claimed and your FIF Income would be $0. If a loss is incurred where you are forced to use the CV method, then this can be claimed.
Example:
Total FIF Investments - FDR method: $10,000
Total FIF Investments - CV method: $9,000
You would still use the lowest of the two values. $9,000 under the CV method would be returned as income in your tax return.
There are also investments where the FDR method is prohibited and you are forced to return them under the CV method.
Example:
Total FIF Investments - FDR method: $9,000
Total FIF Investments - CV method: $10,000
Total FIF Investments – Forced CV: $500
You would return the FDR Calculation + the Forced CV calculation, total income $9,500.
As mentioned above, there are other methods to calculating FIF income, only the two most common methods have been discussed and would likely apply to 95% of individual investors.
FIFs can be a complex area of tax and if you are unsure, you should seek professional advice.
I am providing what is hopefully a brief, simple and easy to understand guide below and is applicable to individual investors only.
This is also only a basic guide, for more complex situations a discussion with a professional may be warranted.
I hope this helps answer some basic questions people have about FIFs and the way they are treated for tax purposes.
How do I know if my investment is a FIF investment?
A FIF investment is an offshore investment that is either:
- A foreign company
- A foreign unit trust
- A foreign superannuation scheme
- An insurer under a foreign life insurance policy.
Am I required to make a FIF income calculation?
A De-Minimis exemption exists for Natural Persons (Individual Investors), if the total ~cost~ of your FIF investments does not exceed $50,000 during the year, you do not need to calculate FIF Income. Instead you just return the actual dividends received (if any) from the FIF investments. This amount can be $100,000 in the case of joint ownership as the $50,000 would then apply at an individual level.
Please note that the De-Minimis exemption only applies to ~individual~ investors, other entities (companies, trusts etc.) are required to calculate FIF Income regardless of the overall cost.
If your ~cost~ basis is >$50,000, then FIF income needs to be calculated.
Example:
Individual Investor A
Total ~Cost~ of FIF Investments: $45,000, Market Value: $60,000
Individual Investor B
Total ~Cost~ of FIF Investments: $55,000, Market Value: $40,000
Only Investor B would be required to make a FIF calculation as the De-Minimis exemption does not apply because their cost basis is >$50,000. Investor A could, however, elect to treat their investment as a FIF and return income under the FIF rules.
Another exemption that exists is for ASX-listed Australian Companies. It is important to note that there are some that are still regarded as a FIF Investment. You can check if an Australian investment is exempted via the IRD website:
https://www.ird.govt.nz/income-tax/...t-fund-australian-listed-share-exemption-tool
How do I calculate my FIF Income?
I am only going to discuss the two most popular methods for FIF Income calculation that would apply to 95% of people, the FDR (Fair-Dividend Rate) method and the CV (Comparative Value) method.
The calculation that provides the total lowest value would be used. The method you choose must be applied to all investments, you cannot ‘Cherry Pick’ based on what is lowest at an individual investment level.
1. FDR Method: 5% of the Market Value at the beginning of the tax year + Quick-sale Adjustment
The quick-sale adjustment is not discussed. The quick sale adjustment applies when a FIF investment is purchased and sold within the same tax year.
2. CV Method: Closing Market Value + Gains – Opening Market Value + Purchases
Example:
Investment Cost: $50,000
Market Value as at 1 April 2023: $45,000
Market Value as at 31 March 2024: $55,000
Dividend Issued: $500
FDR Method: 45,000 x 5% = $2,250
CV Method: 55,000 + 500 – 45,000 = $10,500
Assuming only this investment exists, the lowest value would be used, being the calculation under the FDR method. $2,250 would be returned as Income, the $500 dividend would be excluded income for income tax purposes.
The above calculations would be made for each of your FIF Investments.
If you end up with a negative value (loss), the loss cannot be claimed and your FIF Income would be $0. If a loss is incurred where you are forced to use the CV method, then this can be claimed.
Example:
Total FIF Investments - FDR method: $10,000
Total FIF Investments - CV method: $9,000
You would still use the lowest of the two values. $9,000 under the CV method would be returned as income in your tax return.
There are also investments where the FDR method is prohibited and you are forced to return them under the CV method.
Example:
Total FIF Investments - FDR method: $9,000
Total FIF Investments - CV method: $10,000
Total FIF Investments – Forced CV: $500
You would return the FDR Calculation + the Forced CV calculation, total income $9,500.
As mentioned above, there are other methods to calculating FIF income, only the two most common methods have been discussed and would likely apply to 95% of individual investors.
FIFs can be a complex area of tax and if you are unsure, you should seek professional advice.