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tax effective investing

Tax Effective Investing

Tax Changes

There were two changes to tax rules in 2007. Both of these were of benefit to savers and investors.
Managed funds saw reductions in the amount of tax they pay.

Investments in international equity managed funds are now taxed on 5% of market value of the international equities (referred to as the ‘fair dividend rate’ or FDR method). This provides greater certainty of tax treatment.

Customers on a 19.5% tax rate who invest in a Portfolio Investment Entity (PIE) managed fund benefit from paying tax at their personal tax rate rather than the company rate of 33%.
Customers on a 39% tax rate benefit from paying tax at the 33% capped rate (reducing to 30% in April 2008) if investing through a PIE rather than directly.

Customers who invest in New Zealand and Australian equities via PIEs will benefit from tax exemptions on capital gains.

Fair Dividend Rate (FDR) Regime
 Under the old rules both dividends and capital gains were taken into account when calculating tax.

Now the FDR rules apply regardless of the investment style (active or passive) or country of origin, though Australian equities are generally excluded from these rules.

Now most international investments (excluding those that are interest bearing) held by a managed fund are generally taxed on 5% of their market value at the beginning of the tax year, Earnings from dividends and capital gains during the year are not included.

The result is that tax paid by international equity funds that produce good distributions should be lower under the new FDR rules than was previously the case..

Portfolio Investment Entity (PIE)
From 1 October 2007, fund managers could elect to enter their managed funds products into the Portfolio Investment Entity (or PIE) regime. Qualifying funds are known as PIEs.
All of the leading fund managers in NZ have converted their funds into the PIE Structure.

PIEs are exempt from paying capital gains tax for most New Zealand and Australian shares. PIEs also pay tax on investment income based on the tax rates of individual investors (capped at 30%), rather than at a flat rate.

Want More Information About the Tax Rules?
I have available a number of articles about the new taxes that apply to investment portfolios.
CLICK HERE to send me an email if you would like to have PDF copies of the articles to read.

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