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Disclaimer:  This has been prepared as a helpful guide.  While all care has been taken in the preparation of this information, Lyfords Limited and Lyford Asset Management Limited gives no warranty as to the accuracy of the information and takes no responsibility for any errors or omissions.  It does not constitute financial or product advice.  You are encouraged to seek specialist taxation advice relevant to your personal circumstances. 

Information provided here is given as a guide only and we recommend discussing your personal situation with a qualified investment adviser or your accountant.

Investment Tax Changes Effective 1st April 2007

Completing your 2008 Tax Return - Investment Portfolio

New taxation rules were introduced in 2007.  The rules are complex and we have provided this information to help simplify the interpretation and provide some guidance if you do your own tax returns.  However, for taxation advice relevant to your personal circumstances, we always recommend that you talk to your tax adviser.

If you invest in your own name the key thing to look at is the total value of your overseas share investments: if the total is over $50,000 and they went up in value (including any dividends received) then you may need to pay some extra tax. If they fell in value (including the dividends) then there will be no extra tax.

If you invest via a family trust then the $50,000 limit is not relevant: tax will be paid on the gain in the value of the portfolio regardless of its size and there will be no tax if it fell in value.

There are several levels of complexity with the new tax rules.  We have mentioned only the most relevant in relation to your investments.

Tax Returns:
Tax returns are due 7^th July  (or 31 March of the following year if you use a tax agent (such as an accountant)

-          IR 3 (individual) Box 17 “overseas income�, Box 13 “New Zealand Fixed/cash Interest Income�, Box 14 New Zealand Dividend income.

-          IR 4 (companies) Box 18 “overseas income�

-          IR 6 (family trusts) Box 13 “overseas income�

In addition if you have investments that qualify under FIF (Foreign Investment Fund) rules you need to complete:
  IR 447 FDR method*
  IR 448 CV method*

This information may not apply to you
If your investments are held in fixed interest funds or through New Zealand domiciled fund managers such as ING and Tower Trust using New Zealand domiciled funds registered as PIE (Portfolio Investment Entity) investments then:

-          record Gross fixed interest or interest from cash funds received in Box 13B on the IR 3, Resident Withholding Tax deducted in Box 13A

-          income distributions from PIE investments do not have to be included in your return.  It is very important to notify the fund manager of your correct PIR (Prescribed Investor Rate) tax rate.  If the PIR rate is too high you will not receive a rebate as this is a final tax.

-          if you do have FIF funds you may be exempt if the cost of the initial investment is less than $50,000 NZD (or $100,000 for joint investors).  For example you may have invested $7,500 into OM-IP Series 2 and $40,000 into OM-IP series 6 but the current value of your investments may be now be over $70,000.  As your initial cost was $47,500 you are exempt.  This is the “de-minimis exemption�.

-          enter any overseas income received in Box 17.

-          enter any tax deductible expenses incurred in Box 26.  These expenses could be insurance premiums for income protection insurance (indemnity income protection policies only), on-going service fee, portfolio monitoring fees, accountant fees.

NOTE: If your investments are held in a family trust the de-minimis exemption does not apply and you will need to account for FIF investments either calculating FDR or CV. 

Key terms:
FIF Rules: Foreign Investment Funds
A FIF is a right in a foreign company, foreign superannuation scheme, foreign life insurance. This will include Australian unit trusts and UK investments trusts.

Bonds and fixed interest funds are dealt with under the accrual rules.

The following funds are exempt FIF rules:

-          PIE funds

-          New Zealand shares (imputation credit accounts)

-          Australian listed companies (shares on the All Ords index, Australian resident which have a franking account)

-          GPG (5 years), NZIT (2 years)

Funds that do fall under FIF rules are:
(this is only applicable if you held FIF investments at any time in your income tax year that cost in excess of $50,000 NZD (or $100,000 for joint investors - original value NZD) or your investments are held by a 'non-natural person, such as a company, or family trust.)

-          Australian Unit Trusts

-          OM-IP series funds (FDR calculation permitted)

-          LionTamer funds (FDR calculation permitted opening value $1.00 per unit)

-          UK listed investment trusts

-          Macquarie Gilt Edge Access cash account (CV calculation only, FDR prohibited)

-          ING Diversified Yield Fund, ING Regular Income Fund (exempt optional calculation FDR or CV allowed)

PIE: Portfolio Investment Entity

Most New Zealand based fund managers have converted their retail funds into PIE funds.  Examples are Private Portfolio Service Master funds (PPS), ING property Securities Fund.

PIR: Prescribed Investor Tax Rate.  This is your personal tax rate eg 19.5%, 33%, 39%.  In a PIE investment the maximum tax rate is 30% effective 1st April 2009 (33% prior to this).

Trusts can select a PIR of 30% (33% prior to 1st April 2009) or 0%. The zero rate may be appropriate where the trust has beneficiaries on low incomes.

NOTE: For investments in PIE funds held jointly the declared PIR tax rate must be the tax rate of the highest tax paying individual.  The PIR rate needs to be the highest tax rate over the previous two years.

FDR Calculation: Fair Dividend Rate

For FIF investments where an individuals holding is greater than $50,000 the taxable income is calculated as 5% of the opening market value at 1^st April 2007.  If FDR method is used it must be used on the total FIF investments except where funds may have an FDR exemption.

This method should be used if the total value of an offshore shares portfolio (including dividends received) has increased by more than 5% during the tax year.

CV Calculation: Comparative value Method

A CV calculation is used where FDR is not allowed or the CV calculation results in a lower taxable value

Comparative value  = (closing market value + total sales proceeds + dividends received) €œ (opening market value + total value of purchases)

This method should be used if the value of an offshore share portfolio has risen by less than 5% (or declined) during the tax year.

If the CV calculation is negative, losses fall to zero.  The loss is not deductible.  Where a fund is FDR excluded and a CV calculation has to be done eg. ING Diversified Yield Fund then if the CV calculation is negative the loss can be offset against other income and the loss can be carried forward to the next tax year.

Investors who qualify under the FIF Rules
You need to do a FDR or CV calculation if:

-          you held FIF investments at any time in the 2008 income year that cost in excess of $50,000 NZD (or $100,000 for joint investors) or;

-          your investments are held by a 'non-natural person, such as a company, or family trust.

We recommend calculating FIF income by both FDR and CV method.   If the CV method calculates as negative the income is returned on your statement as nil.  If your CV calculation shows a lower assessable income then use CV.  If the FDR calculation is lower then use FDR.

NOTE: If you do have investments in ING Diversified Yield fund or ING Regular Income Fund the IRD has deemed these to be exempt funds and allow the CV method to be used to calculate the loss and make it deductible against your other income. This loss can be carried forward.

Completing your IR 3 (individual) tax return:
1) Under New Zealand Income enter:
Total Gross New Zealand interest received in Box 13B.

Resident Withholding Tax deductions in Box 13A

Total Gross Dividend, Box 14B

Dividend Resident Withholding tax (include any paid under “Overseas Income�),  Box 14A

Dividend imputation credit (include any paid under “overseas Income�), Box 14

2) Under Overseas Income enter:
Total Gross Income, Box 17B (calculated by FDR or CV)

Foreign withholding tax, Box 17A

3) Fees & charges enter in question 26:
On-going service fee, or portfolio monitoring fees enter in Box 26

If you have paid income protection insurance premiums (indemnity insurance only) add this to the administration and monitoring fee.

Disclaimer:  This has been prepared as a helpful guide.  While all care has been taken in the preparation of this information, Lyfords Limited and Lyford Asset Management Limited gives no warranty as to the accuracy of the information and takes no responsibility for any errors or omissions.  It does not constitute financial or product advice.  You are encouraged to seek specialist taxation advice relevant to your personal circumstances.   Copyright  2008 Lyford Asset Management Limited

Information provided here is given as a guide only and we recommend discussing your personal situation with a qualified investment adviser or your accountant.