Fair Dividend Rate (FDR)
What is the Fair Dividend Rate?
The Fair Dividend Rate (FDR) rules were introduced in April 2007. They are a component of the Foreign Investment
Fund (FIF) tax income determination rules and sit alongside the Comparative Value (CV) method. These rules are used
to determine assessable income derived from investments of global shares, including unit trusts.
Under FDR, global shares are deemed to generate ‘dividend income’ equal to 5% of the opening market value of the
global share portfolio. In addition to this ‘dividend’ FDR assessable income includes a component of any realised gains
on ‘quick sales’ undertaken throughout the tax year. For more information read the FDR Information Sheet or contact
an Investment Adviser.
There are exemptions to the definition of global shares, the most significant of which is investment in shares listed on
the Australian All Ordinaries Index (the ASX) that meet certain criteria.
Who do FDR Rules apply to?
The FDR rules only apply to individual or joint investors who have global share portfolios that cost greater than
NZ$50,000. A ‘portfolio’ investment is a holding that represents less than 10% of the shares in a company.
Who is exempt from the FDR Rule?
There is a de-minimise test for investors.
If an individual or joint investor, has a global share portfolio, with a total cost value less than NZ$50,000 (or $100,000
for joint holdings) at the beginning of the tax year (e.g. 1 April) then the FIF rules (and therefore FDR) do not apply. The
Comparative Value Method may apply to these investments.
This exemption does not extend to:
•
Family Trusts;
•
Unit Trusts;
•
Pooled Funds (including PIEs); or
•
Companies.
Family trusts and other ‘entities’ are taxed under the FIF rules, irrespective of the cost of their global share portfolio.
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Where FDR Fits In
An overview of the broad tax rules on overseas shares that apply to most investors.
Overseas Shares
A foreign
company that
is controlled by
New Zealand
resident/s
Where more
than 10% of a
foreign company
is owned, where
that company is
from a grey list
company
All other overseas shares, Foreign Investment Fund (FIF) rules apply
Controlled
foreign company
(CFC) rules apply
Foreign
investment fund
(FIF) rules do not
apply
Portfolio
Investments in
global shares
(holdings of less
than 10% of the
company or unit
trust) from any
country - the
grey list does not
apply
Foreign life
insurance and
superannuation
policies
Where more
than 10% of a
foreign company
is owned, when
that company is
from a non-grey
list company
Fixed rate shares
Income taxed
using the
accounting
profits method
or the branch
equivalent
method
Taxed on
dividends only (if
held on capital
account)
FDR applies,
noting that
individual and
family trust
investors can
elect to apply
the comparative
value method
Comparative
value method
usually applies
All methods,
except FDR, can
apply subject
to restrictions;
(i.e. Accounting
profits, branch
equivalent,
comparative
value, deemed
rate of return)
All methods,
except FDR,
can apply but
comparative
value method
will probably be
most widely used
The countries currently on the grey list are Australia, Canada, Germany, Japan, Norway, Spain, the United Kingdom
and the United States.
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How is Tax calculated under FDR?
The concept of FDR is that investors are assumed to have earned an income of 5% of the opening value of the total
global share portfolio held at the start of that tax year (1 April).
For individuals and family trusts
Taxable income will be the lower of:
•
The opening balance of your global share portfolio multiplied by 5%, plus any quick sale adjustment; or
•
Your actual return over the year (as calculated using the CV method).
If your actual return is a loss, your FDR taxable income is zero. All FDR calculations are based on the NZ Dollar Value
of the global share investments.
Example
•
Global share portfolio = $100,000 at the start of the year with no quick sales.
•
Taxable income deemed = $5,000 (5% of $100,000).
•
Tax levied on this amount at the investors personal tax rate.
•
E.g: 33% Marginal Tax Payer = $1,650 (33% of $5000).
This is the only tax to pay under the FDR, there is no further tax to pay if the global shares are subsequently sold
during the year. Furthermore, there is no further tax to pay if additional shares are purchased during the year and held
at the year end.
For companies and other entities
Taxable income is your opening balance multiplied by 5%, plus any quick sale adjustment. There is no ‘relief’ for
returns below 5% for investors who are not individuals, or family trusts.
Quick sale adjustments
Quick Sales only apply to investors who have bought and then sold a global share during the investors tax year.
Your taxable income on quick sales is the lower of:
•
actual gain; or
•
5% of the average cost of shares sold (known as peak holding adjustment).
How FDR will apply under three return scenarios
Assumes grey list investments for calculation of tax under previous rules and that the investor is an
individual or family trust (not a company or fund).
Gain of 17.5%
Gain of 3.5%
Loss of 10%
Starting value
$100,000
$100,000
$100,000
Capital gain
$15,000
$1,000
-$12,500
Gross dividends received
$2,500
$2,500
$2,500
End value
$117,500
$103,500
$90,000
Taxable income under previous rules
$2,500
$2,500
$2,500
Tax payable under previous rules (at 33%)
$825
$825
$825
Taxable income under FDR
$5,000
$3,500
$0
Tax payable under FDR (at 33%)
$1,650
$1,155
$0
Difference in tax payable under FDR
$825
$330
-$825
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Frequently Asked Questions (FAQ’s)
How are my global shares taxed if I am not taxed under FDR?
The status quo applies, in that you are taxed on dividends only.
What if I invested in global shares after the start of the year (e.g. 1 April 2008)?
If you are a natural person and purchased global shares after 1 April, and the total cost of all your FIF investments
increase to more than NZ$50,000 as a result of the purchase, you will be subject to the FIF rules (and thus FDR) for
that year.
Your taxable income will be based on the cost of your global share portfolio on 1 April 2008. If you held no global
shares at this time, then your FDR liability will be nil (i.e. opening balance of zero multiplied by 5%).
If you subsequently sell these shares before the end of the tax year (31 March 2009), the quick sale rules will apply.
However, if the shares are held for the rest of the year, any dividends received from these global shares should not be
included in your tax return.
What if I bought and sold global shares during the year?
The Quick Sale rules apply. The taxable income from Quick Sales is the lower of your Peak Holding Adjustment and the
gain from the quick sales.
What is the Comparative Value (CV) method?
In general terms, under the Comparative Value method all returns (both dividends and capital gains) are taxable,
including those arising from currency movements.
For individuals and family trusts that use the FDR method, relief is provided for returns below the 5% cap in any tax
year as these investors have the ability to switch freely between the FDR method and the Comparative Value method
between income years.
Where such an investor receives a total return between 0% and 5% in any year they will pay tax at their applicable tax
rate on that actual return. For example, if a portfolio returns 3% over a year, the taxable income will be 3%.
If a loss is incurred, no tax is payable in that year but no tax loss will be recognised to offset against other income
or carry forward.
Craigs Investment Partners clients
We provide all clients in our portfolio management services with comprehensive tax reports, showing income
received under the FDR method (the FDR summary) as well as for those taxed on dividends only (the Schedule of
Taxable Income).
How do clients know what shares are taxed under FDR?
We provide FDR tax reporting for clients in our Managed Portfolio Service. We monitor changes to the ASX indices
and maintain a database that classifies shares depending on whether we believe they are deemed to be a local or
global share for FIF purposes. Also, the Schedule of Taxable Income groups shares by their tax classification.
Disclaimer: This report is a private communication to clients resident in New Zealand and is not intended for public circulation or publication
or for the use of any third party, without the approval of Craigs Investment Partners Limited. This communication is not intended for distribution in the United States. While this report is based on information from sources, which Craigs Investment Partners Limited considers reliable,
its accuracy and completeness cannot be guaranteed. Craigs Investment Partners Limited, its partners and employees do not accept liability
for the results of any actions taken or not taken upon the basis of information in this report, or for any negligent mis-statements, errors or
omissions. Those acting upon information and recommendations do so entirely at their own risk. Craigs Investment Partners Limited and/or its
partners and employees may, from time to time, have financial interest in respect of some or all of the matters discussed. The research analyst
or analysts responsible for the content of this research report certify that: (1)the views expressed and attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other subject matter as
appropriate; and, (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views
contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.
Important: Craigs Investment Partners is not a tax adviser. We recommend individuals seek specialist advice from their usual taxation adviser.
This report is based on our interpretation of current information, which is subject to change. A free disclosure statement is available on request.
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