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💵 FIF Deemed Rate of Return (DRR) Method

The Deemed Rate of Return (DRR) Method taxes only the distributions (dividends) received from foreign investments. No tax on unrealized capital gains, only actual cash distributions.

Key Point: DRR Method FIF income = Distributions received during tax year. Ignore capital gains/losses completely. Best for high-dividend stocks where distributions exceed 5% of value. Very simple record keeping.

DRR Method Formula

FIF Income = Total Distributions Received
Where:
Distributions = Dividends, interest, other distributions in NZD
Capital gains = Ignored
Capital losses = Ignored

Simple DRR Example

High dividend US stock:

Investment value: $100,000 (irrelevant for DRR)
Dividends received: $7,500
FIF Income = $7,500

Market value changes ignored. Tax only on $7,500 at your marginal rate.

When to Use DRR

DRR is Best When:

  • Dividends > 5% of investment value (beats FDR)
  • High dividend yield stocks/funds
  • You want simplest method (just track dividends)
  • Portfolio has large unrealized gains (avoid CV tax)

DRR vs Other Methods:

Method What's Taxed Best When
DRR Distributions only Dividends > 5%
FDR 5% of value Dividends < 5%
CV Value change + distributions Losses/low gains

DRR Advantages

1. Simplicity

Just track dividends received. No market valuations needed.

2. No Capital Gains Tax

Portfolio can grow 50% with zero FIF tax if no distributions.

3. Better Than FDR for High Yield

If dividends 8%, pay tax on 8%. FDR would tax 5% anyway, so DRR only 3% worse despite higher actual yield.

DRR Disadvantages

1. Worse for Low/Zero Dividend Stocks

Growth stocks with 0.5% yield: DRR taxes 0.5%, FDR taxes 5%. FDR better.

2. No Loss Recognition

Portfolio crashes 50%? Still pay tax on dividends. Can't claim losses.

3. Must Have Distributions

Can only use if FIF makes distributions. Not available for zero-dividend investments.

💡 DRR Sweet Spot

DRR perfect for REITs, high-dividend stocks, bond funds paying >5% yield. Tax only cash received, ignore growth. Compare: 7% dividend stock under DRR pays 7% tax, under FDR pays 5% minimum.

⚠️ DRR Restrictions

Cannot use DRR for: Most Australian FIFs (must use FDR or other methods), Investments with no distribution history, Certain non-distributing funds

🔢 DRR Calculations

Example 1: High Dividend Stock

Investment: UK dividend stock
Dividends received: GBP £4,200
Exchange rate (average): 0.50
Dividends NZD: £4,200 ÷ 0.50 = $8,400
FIF Income = $8,400

Example 2: REIT Investment

US REIT value: $150,000 (not used in calc)
Quarterly distributions:
Q1: $2,100, Q2: $2,250, Q3: $2,200, Q4: $2,150
Total: $8,700
FIF Income = $8,700

Compare to FDR:

FDR would tax: $150,000 × 5% = $7,500
DRR taxes: $8,700
DRR worse by $1,200 income
But yield is 5.8%, close to FDR 5% threshold

Example 3: Zero Dividend Growth Stock

Tesla stock: $80,000 value
Dividends: $0 (Tesla pays no dividend)
Cannot use DRR (no distributions)

Must use FDR or CV method instead.

Example 4: Multiple DRR Holdings

Investment Distributions
UK REIT $6,200
US Dividend Fund $4,800
Canadian Utility Stock $3,100
Total FIF Income $14,100

DRR vs FDR Decision

Portfolio: $200,000, Dividends: $9,000

Method FIF Income Tax (33%)
DRR $9,000 $2,970
FDR $10,000 $3,300

Choice: DRR better (yield 4.5% < 5% threshold). Saves $330 tax.

🌍 Real-World DRR Examples

1
REIT Income Investor

Retiree with high-income REITs:

Total REIT portfolio: $300,000
Average yield: 6.5%
Annual distributions: $19,500
FIF Income (DRR): $19,500
Tax at 33%: $6,435

If Used FDR:

FIF Income: $300,000 × 5% = $15,000
Tax: $4,950
FDR saves $1,485

Decision: Use FDR even though yield exceeds 5%. Cap tax at 5% threshold.

2
Low Dividend Portfolio
Tech growth portfolio: $250,000
Yield: 1.2%
Distributions: $3,000
DRR income: $3,000
FDR income: $12,500
DRR better (saves $9,500 taxable income)

🎯 Test Your Knowledge

Quiz on FIF DRR Method

1. DRR Method taxes:
Distributions only
5% of value
Capital gains
Total value change
2. Dividends $6,000, value increased $15,000. DRR FIF income:
$6,000
$15,000
$21,000
$9,000
3. DRR is best when dividend yield is:
0-2%
2-4%
Less than 5%
Above 5%
4. Main advantage of DRR:
Always lowest tax
Simple, no capital gains tax
Can claim losses
Government rebate
5. Can you use DRR for zero-dividend stocks?
Yes always
No, need distributions
Yes with approval
Only first year
6. Value $100K, yield 3%, distributions $3K. Better method:
DRR ($3K income)
FDR ($5K income)
Same result
Cannot determine
7. Portfolio falls 30%, dividends $4K. DRR taxes:
Nothing (loss)
The 30% loss
$4K dividends
-$26K
8. DRR requires tracking:
Market values
Distributions only
Purchase costs
All transactions
9. Value $200K, yield 6%, distributions $12K. Choose:
DRR better
FDR better (caps at 5%)
Same tax
Use CV
10. DRR method best for:
Growth stocks (no dividend)
Moderate dividend stocks (2-4% yield)
High dividend (>6% yield)
All investments equally

🧮 Try DRR Calculator

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