Understanding How Tax Works On Your Investments

How does tax work?

Investment funds in New Zealand (NZ) are subject to tax regulations set by the Inland Revenue. Each year in April, an amount of tax is due based on the previous 12 months. Instead of deducting tax at intervals throughout the year, tax calculations are made based on the unit pricing deduction.

How is it calculated?

The tax amount owed is calculated differently depending on whether your portfolio holds investments in NZ, direct shares both local and globally and ETF’s or listed trusts.

For Funds with NZ investments:

If you hold funds with investments in NZ, you are taxed on the income received by the fund, which includes dividends from underlying companies. Tax imputation credits are deducted from this income. Imputation credits are available when an NZ company has already paid company tax on the dividends. 

For Funds with international investments:

In the case of funds holding international shares or overseas funds, tax is calculated under the Foreign Investment Fund (FIF) rules. The tax calculation is based on the average balance of your investments throughout the year, rather than the income received. The calculation involves multiplying your average balance by 5% and then by your Prescribed Investor Rate (PIR) or Resident Withholding Tax (RWT) rate depending on the scheme or fund you are in. For example, if your PIR is 28%, the tax cost would be 1.40% of your average balance during the year. Foreign tax credits received from dividends paid by the underlying companies are deducted from this amount, resulting in the net tax payable.

Why do I pay tax when my portfolio value has declined?

The tax payable on an investment fund is not a capital gains tax. It is based on the income earned in the case of NZ funds, or the average investment balance in the case of global funds. Even when your portfolio value has declined, you are still liable for tax based on these criteria. While this may seem unfair, it is similar to rental income tax on a property that has decreased in value.

How can you ensure you are paying the right tax?

To ensure accurate tax payments, it is crucial to elect the correct Prescribed Investor Rate (PIR) when discussing your investments with us. If your tax status or PIR changes, you must let us know as soon as possible. However, please note that PIR changes cannot be backdated for previous tax years.

Who calculates the tax?

 Tax calculations for investment funds are generally handled by the scheme or platform administrator. They calculate tax across multiple fund managers and adviser groups. We have full confidence in their systems and processes to ensure accurate tax treatment and reporting.

What is my tax statement?

Tax statements, which provide a breakdown of income received, tax credits applied, and tax amounts payable, are generally available in late April or by the end of May. If you noted an incorrect PIR, you can adjust your deduction in your Income Tax Return. However, if your PIR was correct, you do not need to provide any additional information in your personal return. Everyone's tax situation is unique, and if you are unsure, you should seek advice from an accountant or suitably qualified tax professional.

PIE investment funds

It's important to note that your tax is calculated based on your Prescribed Investor Rate (PIR), which is either 10.5%, 17%, or 28%. This is a benefit of investing in PIE funds, as the top tax rate is 28% rather than the higher amounts applicable under the resident withholding tax (RWT) payable on direct share holdings or ETF or overseas listed trusts. We would encourage all investors to consider tax as a small part of the bigger picture and a cost of investing, similar to tax on earning an income. If you would like clarity on tax for various investments or tax specific to investment funds, we suggest you seek further information from your adviser or a tax specialist.