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🌏 FIF Cost Method (CM)

The Cost Method is a variation of the Comparative Value (CV) Method used specifically for the first year you hold a foreign investment. Instead of using opening market value (which doesn't exist), you use the cost of acquisition.

Key Point: Cost Method = (Closing Market Value - Cost) + Distributions. Used only when you acquire a FIF during the tax year and have no opening market value. From the second year onward, switch to regular CV or FDR methods.

Cost Method Formula

FIF Income = (Closing Value - Cost of Acquisition) + Distributions
Where:
Closing Value = Market value at 31 March (year end)
Cost = Purchase price + transaction costs in NZD
Distributions = Dividends received after purchase

When to Use Cost Method

  • First year only: When you purchase FIF during tax year
  • No opening value: Investment didn't exist at 1 April
  • Mid-year acquisition: Bought anytime between 1 April and 31 March

Simple Example

Purchased US ETF in October:

Purchase date: 15 October 2024
Cost: USD $50,000
Exchange rate: 0.62 NZD/USD
Cost NZD: $50,000 ÷ 0.62 = $80,645
31 March 2025 value: USD $54,500
Exchange rate: 0.58
Closing NZD: $54,500 ÷ 0.58 = $93,966
Dividends NZD: $850
FIF income = ($93,966 - $80,645) + $850
= $14,171

Next Year: Switch to CV or FDR

From 1 April 2025 onward, opening value = $93,966. Use either:

  • CV Method: Track value changes from $93,966 opening
  • FDR Method: Calculate 5% × $93,966 = $4,698

🔢 Cost Method Calculations

Example 1: Purchase Early in Year

Purchased: 10 April 2024 (day after year start)
Cost: $75,000 NZD
31 March 2025: $82,000 NZD
Dividends: $1,200
FIF income = ($82,000 - $75,000) + $1,200 = $8,200

Example 2: Purchase Late in Year

Purchased: 28 February 2025 (1 month before year end)
Cost: $100,000 NZD
31 March 2025: $101,500 NZD
Dividends: $0 (too soon)
FIF income = $101,500 - $100,000 = $1,500

Example 3: Multiple Purchases Same Year

Purchase Date Cost NZD
May 2024 $30,000
August 2024 $25,000
December 2024 $20,000
Total Cost $75,000
31 March 2025 value: $85,000
Dividends: $2,100
FIF income = ($85,000 - $75,000) + $2,100 = $12,100

🌍 Real-World Examples

1
New Investor First FIF

First-time overseas investment:

Purchased Vanguard ETF: September 2024
Cost USD $80,000 = NZD $128,000
31 March value: USD $86,000 = NZD $145,000
Dividends: NZD $2,800
FIF income = ($145,000 - $128,000) + $2,800 = $19,800
Tax at 33%: $6,534
2
Loss in First Year
Purchased: November 2024, Cost $90,000
Market crash by 31 March: $78,000
Dividends: $1,500
FIF income = ($78,000 - $90,000) + $1,500 = -$10,500
Loss reduces other taxable income by $10,500

🎯 Test Your Knowledge

Quiz on FIF Cost Method

1. Cost Method is used:
Every year
First year only when acquiring FIF mid-year
Never
Only for losses
2. Cost $60K, Closing $68K, Dividends $1.5K. FIF income:
$8,000
$9,500
$68,000
$1,500
3. After first year, you should:
Continue using Cost Method
Switch to CV or FDR method
Stop calculating FIF
Use DRR method
4. Cost includes:
Just purchase price
Purchase price plus transaction costs in NZD
Market value
Only foreign currency amount
5. Purchase in February, value falls by March. FIF income:
Zero
Negative (loss)
Still positive 5%
Cannot calculate
6. Purchased 3 times in one year. Cost basis is:
First purchase only
Last purchase only
Total of all purchases
Average purchase price
7. Cost Method differs from CV Method because:
It uses 5% rate
Uses cost instead of opening market value
Excludes dividends
No difference
8. If you buy on 1 April (year start):
Cannot use Cost Method
Use Cost Method (no opening value exists)
Must use FDR
Exempt from FIF first year
9. Cost Method formula includes:
Only closing value
Only cost
Closing value, cost, and distributions
Opening value × 5%
10. From year 2, opening value becomes:
Original cost
Previous year's closing value
Zero
Average of cost and closing

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