Even just writing that word low-key fills me with dread.
There’s no denying that tax is a very important consideration when choosing what to invest in.
Tax is basically another fee; it has to get paid before you get your sweet, sweet returns. Unlike fees, however, it’s not easy to figure out what it’s actually costing you.
Personally, it’s always been quite a weak area of my investing knowledge. Hearing a bit about how different investments are taxed at the NZX and S&P DJI ETF Masterclass (awesome investing conference) inspired me to learn more about what you’re actually paying in tax when you choose a fund to invest in.
You can go to Smartshares.co.nz and see that they charge 0.35% for every dollar investing in the US500 fund. “Ok, I plan to invest about $5k so I might pay around $18 a year in fees. Sweet, I can live with that”. With tax it’s a lot more difficult; there are all kinds of complicated stuff that determines what you actually pay in tax. Stuff like “imputation credits” . (This is more complicated extra tax stuff – hit up Mr. Google or myself if you’re super keen to know what they are!)
Because of this, it’s impossible to say with any degree of certainty the exact rate of tax you’ll pay on any investments. However, we can look at NZ tax law, and get a reasonable idea of what we might have to pay.
What’s the law on tax?
First things first, I’m definitely no tax accountant. If you have a complicated situation and you require help, seek a professional.
With that out of the way let’s dive in.
How are local or Australian investments taxed?
According to the IRD, if you invest in ETF’s which track securities listed on the NZ or AU stock exchanges, you only pay tax on the income received on these investments (the dividends you get paid) and not the capital gains (the share price going up).
So let’s say you invest $10,000 in the FNZ fund on Smartshares, which tracks the NZX50.
- Over the year the companies within the fund pay out a 2% ($200) dividend which is liable for tax.
- Income from Smartshares funds is taxed at a rate of 28% so you would pay $56 ($200 * 28%) in tax for the year.
- This amounts to 0.56% of what you had invested originally.
This is how it works in theory, but in practice, there’s a lot more going on.
In order to figure out how much tax is paid in tax in practice, I turned to the Smartshares financial statements. 434 pages of nothing but dense financial tables, and I read the whole damn thing cover to cover! (Yes, I am a very fun guy at parties)
I wanted to see what tax was paid on each Smartshares fund, and what percentage of the money invested in each fund that was. So, I painstakingly sifted through the statements for each fund, pulling out the “Tax expense” and total managed assets for each fund. Here’s what I found.
New Zealand Shares
Let’s start off by looking at Smartshares funds which track NZ shares. Here we’ve got the NZX50 fund and NZX10 fund.
At the end of the 2016 financial year units of the NZX50 were worth a total of $213 million. For the year, the total tax expense that was paid was 0.16% of the closing balance. I’ve called this measure the tax percentage.
This means that for every $1,000 invested in the fund, $1.60 was paid in tax. Not too bad right?
For the NZX 10 fund it’s pretty similar, the tax percentage of the closing balance of the fund was 0.24%.
What’s the law around overseas investments?
Overseas investments are taxed differently than local investments. With NZ and AU investments, only the income you receive is eligible for tax.
Overseas investments are subject to FIF (foreign investment fund) tax.
Generally speaking, if you own more than $50k of a foreign investment fund, you’re liable for tax on the value of the investment using what’s called the Fair Dividend Rate. This is 5% of the average balance of the fund throughout the year.
Here are some details of a few overseas Smartshares funds at the end of FY16.
As you can see, the tax percentage is pretty consistent throughout all the funds (between 0.77% and 0.90%).
This means that for every $1,000 invested in one of these funds, between $7.70 and $9.00 of tax was paid.
Still doesn’t sound like a huge amount, but keep in mind that it’s a lot more than you’d pay for NZ funds mentioned earlier.
What does this actually mean for you?
“My eyes are 90% glazed over, but I want to know what it all these numbers mean for me”
All it means is that in general, you’ll pay less tax on NZ ETFs as opposed to ETFs which track overseas share markets. This is due to the fact that investments in overseas share markets incur a foreign investment fund tax.
While it’s important not to give the numbers mentioned in this article too much weight, they can help to shed some light on what tax has actually been paid in the past – giving you a vague idea of future tax.
Even though you pay might pay more tax on overseas investments, that’s absolutely not a reason not to invest in any international funds. It’s just really good to be informed about all aspects of your investments – including the boring stuff like tax!
Hopefully, you learned a bit! I’ve certainly had an absolute crash-course on the subject.
As always, hit me up in the comments or via email to let me know what you thought!
If you’re interested in learning more about passive investment providers in NZ, check out some of my articles below:
- My thoughts on the Sharesies Beta
- Dean from Smartshares answers your questions!
- I chat with Anthony from InvestNow
- Breaking news: Simplicity releases new Investment funds
- I compare the fees of Smartshares and Simplicity
- Smartshares compared to Simplicity: Part two
Or, If you want to learn more about general investment strategy, check out one of the articles below: