- Unlucky reader challenges the value of index funds.
- Questions galore on the $50,000 threshold in the new international share tax regime.
- How to get historical foreign exchange data for calculating that threshold.
QI have followed your column for years and remember that for years now you favoured passive funds.
I invested for myself, my wife and granddaughter in the Tower Tortis International fund, but to be honest we might as well have put our money in a sock under the bed, we would be better off.
To give the granddaughter’s investment as an example: On 20th December 2000 we invested $2000 for her.
Today seven years later, it is worth $1474 — a loss of $526, plus the loss created by inflation, plus the loss of interest we could have earned by putting the money in the bank at say 5 per cent.
Sorry, but please can you explain how passive funds can be a good investment. Please don’t say it will be better over 20 years. Some of us can’t wait that long.
AI hope you can wait at least ten years from 2000. If you are such a loyal reader — and I appreciate your loyalty — you must also know that I have said over and over that you should always plan to leave your money in a share fund for at least 10 years, preferably longer.
That’s because it’s highly unlikely over any ten-year period that you will lose value in any well diversified share investment. One study shows the chance of that happening is about one in 75.
This includes investments in passive funds, also called index funds, which invest in the shares in a share market index. They are cheap to run, and so charge lower fees than other share funds, which is the main reason I recommend them.
Not only are you highly unlikely to lose money, you are highly likely to do well. Generally, shares rise healthily over the long term.
Note my use of the words “highly unlikely” and “generally”. Occasionally, a share market performs badly over ten years.
You had the great misfortune to invest in an international share fund at the worst time in decades — just before a sustained downturn.
Those who invested in international shares from 1997 or earlier were able to take the 2000–2003 downturn in their stride. After all, it followed several years of 30-per-cent-plus returns, as our graph shows. They were still ahead, over the long term.
But you suffered the bust without the boom.
Since then, international shares have again performed well. There’s no knowing where the market will go from here. But there’s a pretty good chance that by 2010 you will be feeling happier about the investment.
If not, I would still suggest you hang in there if possible. You don’t like 20-year horizons, but the fact is that international shares have never fallen over any 20-year period.
By the way, investors in the other type of international share funds — active funds, which charge higher fees because their managers select which shares to buy and sell — have ridden through similar stormy seas in recent years.
What’s happened to your investment has nothing to do with passive management. It’s just that share markets get really wobbly every now and then, and you were unlucky.
Stick around and give your luck a chance to change.
QI have some questions regarding the $50,000 exemption with respect to the new overseas tax legislation.
- Is this a $50,000 exemption or a $50,000 threshold? i.e. if you have $51,000 at purchase price, is $1,000 in the new system and subject to the tax and $50,000 exempt and taxable on income only, or is all $51,000 now included?
- Is the $50,000 exemption or threshold based on the total cost of the shares including brokerage, or is it just the cost of the shares?
This may seem a trivial question, but it becomes important if the $50,000 is a threshold rather than an exemption and one is close to the $50,000 limit.
- Does a married couple qualify for a total $100,000 exemption or threshold at purchase price automatically as a joint unit? Or do the shares have to be held specifically 50/50 in each individual name?
- Would you recommend a couple to sell down to $99,999 at purchase price in order to avoid the considerable problems of proving each year that shares purchased perhaps forty years ago were indeed purchased at a seemingly low price?
ASome searching questions, answered here by Peter Frawley of Inland Revenue:
- The $50,000 is a threshold. That means that if the cost of your overseas shares is $51,000, all of those shares are subject to the new rules.
Note that if you have invested less than $50,000, so that you are under the threshold, you will continue to be taxed on dividends — as well as realised gains if you are a trader — as in the past.
- The $50,000 threshold takes into account brokerage fees if these are part of the cost of buying the shares.
- For a couple to qualify for a total $100,000 threshold, half the shares would have to be held in each spouse’s name.
Alternatively, the couple could have jointly owned shares totalling up to $100,000.
If the couple has some shares owned jointly, and some owned individually, each person would have to add half the cost of the jointly owned shares to their individual total.
For example: A woman owns shares costing $40,000 and her husband owns shares costing $5000. They also jointly own shares costing $30,000.
The woman’s total would be $40,000 plus $15,000 (half of $30,000), which brings her over the threshold. But the man’s total, $5000 plus $15,000, keeps him under the threshold.
- In light of what we’ve said above, let’s change this to “Would you recommend that a person sell down to $49,999…”
My answer — not Peter Frawley’s — is that if your international share holding originally cost, say, $50,000 to $70,000, and you have no plans to buy any more international shares, it would probably be a good idea to sell down to below $50,000. That would save you some tax and some hassle.
If, however, you have larger holdings or plan to grow your international holdings, it’s probably better just to pay the tax.
Generally, I think the diversification gains of owning offshore shares outweigh the disadvantage of paying the tax. Don’t let the tax drive your decisions too much.
Frawley says you won’t have to go to much trouble to pay the tax.
“The new rules have been designed to minimise investors’ compliance costs,” he says. “For those that have a buy and hold approach (i.e., they do not buy and sell shares in the same year) the new rules are relatively simple to apply.”
Individuals will pay tax, at their personal tax rate, on the lower of:
- Five per cent of the market value of their shares at the start of the tax year, or
- The total return on the shares — including dividends and any gain in price — during the tax year.
“If the shares make a loss then no tax is payable,” adds Frawley.
I must admit that sounds like a fair amount of hassle to me. But I guess investors will get used to noting the value of their international shares on April 1 each year, and keeping track of dividends.
“On-line calculators will be available on Inland Revenue’s website which will calculate the tax answers for investors from the data they input,” says Frawley.
By the way, you won’t have to prove each year that your shares cost less than $50,000. You will simply be asked if they cost more than that, in which case you will pay the tax.
If you should be paying the tax but don’t, you are likely to be in trouble if you are audited.
To make things easier for those working out their eligibility for the threshold, Inland Revenue has come up with a compromise.
“A person may choose to treat shares acquired before 2000 as costing half their market value on 1 April 2007 for the purpose of the $50,000 threshold,” says Frawley. “This compliance cost savings measure is intended to cater for situations where a person may no longer have records of the purchase price of shares acquired many years ago.”
This will certainly help some people. But if you bought your shares before the early 1990s, using this shortcut will probably give you considerably higher share costs than were in fact the case — although as long as the total is still under $50,000, that doesn’t matter.
QWe have a couple of shares which were bought some years ago for around 2,000 British pounds and are now worth 55,000 pounds.
How does one calculate the conversion to NZ dollars? Is it the rate that applied at the date of purchase, and if so where can one find out the exchange on a certain day say in 1997.
AYou should use the exchange rate on the date of purchase.
Frawley says there are several websites that have foreign exchange calculators with historical data. One is www.oanda.com/convert/classic, which goes back to January 1990.
I’ve had trouble finding any other calculators that cover a range of currencies and give daily data earlier than that. Do any readers know of any?
For older data, you may have to ask your bank.
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.