💰 How FDR Actually Works

The Deemed Income Concept

FDR taxes you on deemed income (assumed 5% return) not actual income. This creates situations where tax obligations don't match economic reality.

Scenario Comparisons:

The paradox: You can owe tax on foreign investments that lost money. Conversely, if investments performed very well (15% gain), you're only taxed on deemed 5% return - favorable in that scenario.

Calculating Your FIF Income

Step-by-Step FDR Calculation:

1. Determine opening value: Market value of all FIF investments on 1 April (start of tax year)
2. Apply 5% rate: Opening value × 0.05 = FDR income
3. Add to assessable income: Include in tax return as income
4. Tax at marginal rate: FDR income taxed alongside wages, business income, etc.

Multiple Foreign Investments:

If you hold multiple FIF investments (different funds, different countries), calculate FDR on combined total opening value, or can calculate separately for each and sum FDR income amounts.

Other FIF Calculation Methods

FDR isn't the only method - alternatives exist but rarely used due to complexity.

Alternative Methods:

• Comparative Value (CV): Based on actual gain/loss in value. Complex to calculate, rarely better than FDR.
• Cost Value Adjustment (CVA): Cost adjusted for certain factors. Limited applicability.
• Deemed Rate of Return: Less common alternative to FDR.

Why FDR dominates: Simplicity. Opening value × 5% is straightforward. Other methods require complex calculations tracking cost base, currency movements, etc. For most investors, FDR is easiest despite occasionally unfavorable results.

🎯 Exemptions and Special Cases

The $50,000 De Minimis Exemption

If total cost of all foreign investments (excluding Australian shares) is under $50,000, you're exempt from FIF rules entirely.

How the Exemption Works:

Important: Threshold based on cost (what you paid), not current market value. Once you breach $50k, FIF applies even if value later falls below.

Australian Share Exception

Australian shares get special treatment due to trans-Tasman tax agreement.

Australian Shares Treatment:

• Generally exempt from FIF rules
• Taxed like NZ shares - pay tax on dividends received
• Capital gains usually not taxed (unless trader)
• Don't count toward $50k FIF threshold
• Franking credits (Australian tax already paid) may be recognized

Direct vs Indirect Investment

Direct Investment:

Buying shares in foreign companies directly - clearly subject to FIF if over threshold.

Indirect Investment:

Investing through funds domiciled overseas - also subject to FIF. This catches many investors who don't realize: NZ-listed fund tracking US market (like Smartshares US500) is FIF because underlying fund is offshore.

PIE Funds Exception:

NZ-domiciled Portfolio Investment Entities (PIE) are NOT subject to FIF for investors, even if PIE invests in foreign assets. PIE handles FIF at fund level. This is major advantage of PIE funds - individual investors don't deal with FIF complexity.

📋 Practical Implications

Record Keeping Requirements

What You Must Track:

• Opening values: Market value of each FIF investment on 1 April each year
• Purchase dates and costs: For threshold monitoring
• Currency conversions: Convert foreign currency values to NZD
• Investment additions/disposals: Track changes during year
• Method used: Document which calculation method applied

Tax Return Reporting

FIF income must be included in annual tax return (IR3). Section specifically for FIF income where you report calculated FDR amount.

Common Mistakes:

• Not realizing FIF applies to their offshore investments
• Forgetting to include FIF income in tax return
• Using market value instead of opening value for FDR
• Not tracking when breach $50k threshold
• Assuming Australian shares are FIF (they're not)

Strategies and Considerations

Stay Below $50k Threshold:

If close to threshold, might strategically keep foreign investments below $50k to avoid FIF complexity. Limits offshore diversification but eliminates FIF admin burden.

Favor Australian Shares:

Australian shares exempt from FIF and don't count toward threshold. Can hold significant Australian exposure without FIF implications.

Use PIE Funds:

NZ-domiciled PIE funds handle FIF at fund level. You pay tax through PIR (prescribed investor rate) on fund returns, but don't do FIF calculations yourself. Simpler for individual investors even if end result similar.

Consider Timing of Purchases:

If near threshold, timing of new purchases relative to 1 April matters. Purchasing just after 1 April means not included in that year's opening balance calculation.

Professional Advice

FIF rules are complex. If you have substantial offshore investments, professional tax advice recommended.

When to Seek Professional Help:

• Foreign investments approaching or exceeding $50k
• Multiple types of offshore investments
• Uncertainty about which assets are FIF
• Considering alternatives to FDR method
• Have received IRD queries about FIF income

Final insight: FIF and FDR rules ensure NZ tax residents pay tax on offshore investment returns, even if returns aren't realized or distributed. FDR method's 5% deemed income simplifies calculations but can result in tax on losses or underreporting of large gains. Under $50k threshold exempts small investors. Australian shares get favorable treatment. PIE funds eliminate individual FIF calculations. If holding significant offshore investments, understand FIF implications and consider professional advice to ensure compliance and optimize tax position.