This article was published on 14 October 2006. Some information may be out of date.


  • Why I won’t do research on an Aussie resource index fund.
  • Too little time to study the new tax plans for international share investments.

QWe have been investing over the last five years (after a break when we paid off our mortgage) and have a mixture of direct stocks and index funds.

The main opportunity we have missed is the huge growth in Australian resource stocks. I can still recall looking about a year ago at BHP at about $14 and Rio Tinto at about $40 and thinking that sounded a bit steep. Both have approximately doubled since then.

It might not be timely now, but are there any funds that capture that sector as an index? I haven’t been able to find any, and it’s too big a field for us to invest in directly.

AI don’t know, and I’m afraid I’m not going to bother to find out, because I don’t think it would be a good idea to invest in such a fund.

Given that you already hold other shares and index fund investments, it’s not quite so bad if you invest in a fund that specialises in a single industry. But still it’s not wise.

Go back to the late 1990s and you could have been writing to me about American high-tech stocks, whose prices didn’t just double but soared sky high over a short period.

I remember then arguing with a woman who was advising people to invest heavily in US IT stocks. Each time I saw her, she would say something like, “They’ve gone up even more. Do you still think people should stay away?” And I would say yes.

Then, suddenly, high-tech prices plummeted. I haven’t seen the woman since then. Perhaps she’s somewhere in South America fleeing furious clients.

I’m not saying the same will happen to Australian resource shares. But just because they have performed well doesn’t mean that will continue.

Rather than going into an Aussie resource fund, how about an Aussie index fund of all the large companies, which will include the likes of BHP Billiton? You would then get a spread of many different industries.

QThank you for encouraging people to write submissions, several months ago, voicing their concerns about the proposed tax on capital gains on international equity investments.

Every additional submission opposing this tax helped to see this proposal dropped from the Taxation (Annual Rates, Savings Investment and Miscellaneous Provisions) Bill.

Now I am concerned there is very little time for ordinary citizens like me to understand the proposed replacement, the so-called “fair dividend return method” (FDR) for taxing international equity investments. This new proposal seems very short on detail.

I am mainly concerned as to how the chosen proposed tax method is to be applied to managed funds.

Given that the FDR is going to impact on many ordinary New Zealanders who have followed the investment philosophy of diversifying their investments to include foreign equities, it seems extremely unfair that investments in managed funds will be taxed on 5 per cent of the opening value of the fund even if a total portfolio falls short of gaining 5 per cent in value over the year.

It is also unclear as to how Australian managed funds invested in Australian equities will be treated under the new proposals.

Because of the short time frame given to consider and understand the new proposals it would seem sensible to drop any new provisions to tax international equities from the Bill.

This would give the government time to present the suggested new provisions in detail and people time to study the implications of the proposed changes and make submissions on them.

ADon’t thank me, thank all the readers who bothered to send submissions. The Finance and Expenditure Committee was flooded with them.

“We didn’t appreciate the sort of resistance we were going to get,” David Carrigan, senior policy manager at Inland Revenue, said at the Association of Superannuation Funds of NZ (ASFONZ) conference in Auckland this past week. “We got one submission in support, out of about 4,000. I think that was from a real estate agent or something,” he added, to laughter.

About 150 people chose to present their submissions in person, with the committee traveling to Auckland and Christchurch to hear them.

And it all worked. Faced with such opposition, Michael Cullen and Peter Dunne have come up with the FDR alternative (which has nothing to do with Franklin Delano Roosevelt). It looks better, if not perfect.

One worry, as you say, is that there’s little time for us all to get our heads around it, as the committee has to report back to Parliament by November 24, unless an extension is granted.

Only a chosen few will make submissions. The committee says it will invite them “only from a list of interested parties agreed to by the committee.”

The list will include “a cross section of people who already submitted, largely those who made oral submissions,” says Lesley Ferguson, clerk of the committee. She adds that some submitters made excellent points. “It was quite a process to decide who to include.”

Others can, of course, send emails to the committee, “but it’s unlikely they will be processed,” says Ferguson. There is, however, nothing to stop you from emailing or writing to the ministers involved, or your MP.

For those who haven’t caught up with the FDR proposals, here’s a summary:

Individuals with direct investments in international shares that originally cost less than $50,000 are exempt from FDR. They will continue to be taxed as now, on their dividends.

Individuals with portfolios that cost more than $50,000 will be taxed on up to 5 per cent of the value of their shares at the beginning of the tax year.

If their portfolio has grown by more than 5 per cent — from dividends and increases in share prices — that extra growth will be tax-free. They won’t have to carry the excess over into future years.

If they can show that their portfolio has grown by less than 5 per cent, they will be taxed on the actual growth rate.

For example, if a $100,000 portfolio grew to $101,000 over the tax year, and the investor received $2000 in dividends, he or she would be taxed on $3000. If the portfolio dropped by $2000 and dividends totalled $3000, the investor would be taxed on $1000.

If the investor shows their portfolio suffered a loss — the drop in share prices more than offset dividends received — no tax would be payable in that year.

Carrigan says that if the system had been in place over the last 20 years, investors would be taxed on an average of 3.5 per cent of the value of their portfolio — 5 per cent in some years, ranging down to zero in other years.

As you say, managed funds that invest in international shares will simply be taxed on 5 per cent of their value at the start of the tax year, regardless of what happens to share prices or dividends.

This is for fund administrative reasons, says Carrigan. Still, it seems unfair, favouring direct investors.

There are some compensations, though, for at least some fund investors:

  • Higher-income taxpayers will benefit from the maximum tax rate of 33 per cent, as opposed to 39 per cent on direct investment.
  • And from next July 1, employees who invest in KiwiSaver managed funds to which their employers also contribute should benefit from a tax break on the employer contributions.

The idea behind FDR is that 5 per cent is a “reasonable” dividend yield, even though international dividends are often lower. “Actual dividend yields are artificially low because, for example, US companies don’t have incentives to pay dividends because there’s no imputation,” says Carrigan. In New Zealand and Australia, which do have imputation, dividends are higher

On your question about Australian managed funds investing in Aussie shares, Carrigan says they won’t be eligible for the exemption granted to Australian listed companies, so they will be taxed under FDR.

“It gets quite difficult. If you exempted them, you’d have to blacklist them if they started to invest in other things,” he says.

Note, though, that the Finance and Expenditure Committee is looking at whether to keep the Australian exemption anyway. In some cases, it disadvantages investors.

“Australian dividend yields are about 4.5 per cent. Under the exemption, you’d pay tax even if the company’s shares went down in value, but under FDR you wouldn’t pay tax on the 4.5 per cent dividend in years where the shares went down,” says Carrigan.

“Or if you got an 8 per cent dividend from an Australian company, you would pay tax on 8 per cent. But under FDR, you would only pay 5 per cent.”

For similar reasons, the committee is considering whether to retain the exemption for under-$50,000 investors. They, too, would sometimes be better off without it. The GPG exemption is also being debated.

It makes your head spin. As National’s John Key told the ASFONZ conference, “Michael Cullen has had more proposals than Elizabeth Taylor has had husbands. All of this stuff is hugely complex.”

Asked if National would reverse the tax changes if it gets into power, Key said he doesn’t think the present system is good. For example, it discourages investment in non-Grey List countries such as India and China.

He would prefer “a proposal that is fair and easy to understand that eliminates the Grey List. Maybe an option, for simplicity, a rough approximation of dividends could be 3 per cent if you’re a fund or an individual.

“But then there are fiscal implications. Maybe we need to go from 5 to 4 to 3 per cent.”

Your suggestion that the government postpone implementing the international share provisions echoes a suggestion made at the conference about the whole tax bill.

After Peter Dunne acknowledged that, “It’s inevitable that later fine tuning will probably be required,” a delegate suggested a delay would be helpful. Dunne’s response, “You’d never get it absolutely right.”

Still, the FDR stuff is particularly rushed. I agree that we all need more time.

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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.