Tax might be the biggest expense you’ll pay over your lifetime. And you wouldn’t be alone if you said that tax is the most confusing (and perhaps the most boring!) expense you pay, particularly when it comes to tax on your investments.
I’ve gone down the rabbit hole and combined my knowledge of tax with research from various sources, and the result is this article, a general overview of how different types of investments are taxed in New Zealand. In many cases, it’s not as daunting as it appears to be!
Before reading any further, it’s important to understand that the content of this article is very generic, and geared towards individuals who are New Zealand tax residents. Tax is really complicated, this article doesn’t cover every rule and scenario, and the information here may apply differently from person to person, depending on their personal circumstances.
I am not a tax professional and this article is not to be used as tax advice! You should always do your own research and seek advice from a tax professional before applying the information in this article.
1. Tax Essentials
A. IRD number
As a Kiwi investor you’ll need a way for our tax department, the IRD, to identify you as a taxpayer. This is known as an IRD number, which is NZ’s equivalent of a Taxpayer Identification Number. Aussies call this a TFN – a Tax File Number.
IRD – Apply for a personal IRD number
B. Tax Rates
You should be aware of two tax rates when it comes to your investments – your RWT rate and PIR. Which rate you’re taxed at depends on the type of investment you’re in. If you don’t provide your rate to your investment provider, you’re automatically taxed at the top tax rate.
Resident Withholding Tax (RWT) Rate
Your RWT rate depends on your overall taxable income for the tax year. For example, if your annual income is $30,000, the most appropriate RWT rate for you would be 17.5%. RWT is not a final tax, so if you choose the wrong rate you’ll receive a tax bill/refund at the end of the year to reflect any over or underpaid RWT.
|Taxable Income||RWT rate|
|$0 – $14,000||10.5%|
|$14,001 – $48,000||17.5%|
|$48,000 – $70,000||30%|
|$70,001 or more||33%|
Prescribed Investor Rate (PIR)
The PIR applies to investments that are structured as Portfolio Investment Entities (PIEs). Your PIR works similarly to your RWT rate, with a couple of major differences in calculating your rate:
- You need to work out your rate based on the income from each of the past two tax years. You can then use the lowest PIR out of those years.
- PIE income is factored in, in addition to your taxable income.
+ Net PIE income
|$14,000 or less||$48,000 or less||10.5%|
|$48,000 or less||$70,000 or less||17.5%|
|All other cases||28%|
The way that your PIR is calculated means that tax treatment for PIE investments could be beneficial in a couple of circumstances:
- If you recently got a pay increase, as you can use a tax rate that’s based on a previous year’s income. For example, if I earned an income of $45,000 two years ago, and last year doubled my income to $90,000, I can still use a PIR of 17.5%
- If you’re on a 30% or 33% tax rate, as PIRs are capped at 28%
If the two holders of a joint account have different RWT rates or PIRs, the investment provider will usually tax the account at the higher rate. How you can apportion the income to each individual is a topic better discussed with a tax professional.
In NZ we use marginal tax rates. It is a somewhat common misconception that if you earn over $70,000 for example, all the money you earn is taxed at 33%. This is incorrect – only the dollars you earn over $70,000 are taxed at 33%, with your first $14,000 you earn in the year being taxed at 10.5%, income between $14,001 and $48,000 being taxed at 17.5%, and so on.
Another example, is someone who earns $68,000. Let’s say they made an investment that would produce $4000 of interest income. This $4,000 would push them into the highest tax bracket, but not all their income would be taxed at 33%:
- $2,000 of their interest income will be taxed at 30%
- The other $2,000 will be taxed at 33%.
This person could elect to either have a RWT rate of 30% (and have extra tax to pay at the end of the year), or a RWT rate of 33% (and receive a tax refund at the end of the year).
C. Paying tax
In general, there are two methods in which you pay tax on your investments. In many cases, Resident Withholding Tax (RWT) or PIE tax is automatically deducted from you at a certain point in time, like when the income is paid – in the same way PAYE tax is deducted from your salary or wages. For other cases, a tax return is required. I will provide more specific info on each case below as you read along.
2. Tax on investments
Let’s take a look at what tax applies to different types of investments.
A. Bank deposits, Bonds, Peer to Peer Lending
Bank deposits, bonds, and investments in P2P Lending all generate some form on interest.
Tax on interest income from standard bank deposits, bonds, and Peer to Peer Lending, is automatically deducted when it’s paid to you, at your RWT rate.
Most banks offer PIE equivalents of some savings accounts and term deposits (sometimes called Term PIEs). You will have tax deducted on the interest when it’s paid, as well as at the end of the tax year (31 March). These are taxed at your PIR, so are beneficial for those who have a PIR that’s lower than their RWT rate. The term deposits offered through InvestNow are not PIEs.
- Capital gains on bonds are generally taxable
- Fees you pay in relation to earning interest from P2P Lending (such as Harmoney’s service fee, or Lending Crowd’s Interest Flex) should be tax deductible
- Capital losses on P2P Lending (such as write-offs), are generally not tax deductible
B. NZ Shares
Do you own shares in a NZ company, or have invested in individual companies via Sharesies? If so, you may be taxed on your dividends and capital gains.
Dividends automatically have RWT deducted at 33%, at the time the dividend is paid to you. However, many NZ dividend paying companies have imputation credits attached to their dividends, reducing the amount of tax you’re liable for. The amount of imputation credits attached to each dividend varies between companies and each payment. Given the fixed RWT rate of 33%, those on a lower tax rate may be able to file a tax return to claim back their excess tax paid.
The purpose of imputation credits is to mitigate double taxation, given dividends are essentially a company’s profits, which they may have already paid company tax on. Australia has a similar concept known as franking credits.
Capital gains on shares are generally not taxable, that is unless the IRD considers you a “trader”. Unfortunately there’s no black and white rule to determine whether you meet the definition of a trader or not.
Basically if you buy the shares with the intent of selling them for a profit (as opposed to buying and holding long-term to earn dividend income), or are in the business of trading shares, then you could be considered a trader. The IRD will look at things like your trading patterns and frequency to determine whether you’re a trader.
For traders, their capital gains are considered taxable income. However, one advantage that traders have is that they can claim capital losses on shares to reduce their taxable income.
Money King NZ – NZ Dividend Calculator (Google Sheets)
Sharesight – Calculating taxable gains on share trading in New Zealand
Funds contain assets like shares and bonds, which generate taxable income (such as dividends, interest, foreign income) and tax credits. The fund’s tax liability is calculated by the fund manager, then attributed and passed onto the fund’s investors to pay. As an investor, the rate at which you are taxed at depends on what kind of fund it is.
InvestNow Tip: Use the ‘Fund Type’ dropdown on InvestNow’s Fund Search page to filter funds by type.
Multi-rate PIEs (MRPs) are the most common type of PIE fund and are taxed at your PIR. This tax is paid when you sell your investment in a fund, or at the end of the tax year (31 March), which is why you may receive a tax bill from platforms like InvestNow in April. It’s important to give your fund manager or fund platform your correct PIR, as you can’t claim back any overpaid tax with MRPs. Examples of MRPs are:
- Most funds on InvestNow. Filter by PIE on their Fund Search page
- The AMP and Pathfinder funds on Sharesies
- Simplicity‘s investment funds
- SuperLife‘s funds
- Most funds offered by local fund managers such as Milford and Devon
- Most investment funds offered by our banks
Listed PIEs are PIEs that are listed on the sharemarket. Their dividends are always taxed at 28%, but they often contain imputation credits to eliminate your tax on these dividends. You do not have to include listed PIE income on your tax return, but if your marginal tax rate is less than 28% you may want to do so to claim any excess imputation credits to reduce your other taxable income. Listed PIEs include:
- Smartshares ETFs – found on InvestNow, Sharesies, bought directly from Smartshares, or from the exchange.
- Listed property shares E.g. Kiwi Property Group, Vital Healthcare Property
Dividends from listed PIEs may contain Excluded income. Do not include this in your tax return if you file one.
Foreign Investment Funds
These are not PIEs. Popular examples of Foreign Investment Funds (FIFs) are anything you buy through Hatch, or Australian Unit Trusts (AUTs) you can find on InvestNow. Information about tax on FIFs deserves a section of its own – see section D below
D. Foreign Investment Funds
New Zealanders must pay tax on their worldwide income to the IRD, including income from their investments in Foreign Investment Funds (FIFs). The main ways that Kiwi investors might come into possession of FIFs are:
- Owning Australian Unit Trusts (AUTs) on InvestNow (filter Fund Type by AUT on their Fund Search page). These are funds from Vanguard, Morphic, Platinum, Indian Avenue, and some Russell funds
- Buying shares or ETFs through Hatch or Stake
- Owning certain Australian shares, like Xero
I’ll focus on how the above FIFs are taxed. If you hold other kinds of overseas investments, the way they are taxed may differ.
FIF tax rules (investing more than $50,000)
You must apply FIF tax rules if you hold over $50,000 in FIF investments. This rule requires you to choose from one of two methods to calculate your taxable income on each FIF investment you own. I won’t get into detail into the calculations, but fortunately InvestNow and services like Sharesight can perform the calculations for you, or you can use IRD’s calculator. The two methods are (copied from InvestNow’s tax guide):
Fair Dividend Rate (FDR) – 5% of the opening market value at the beginning of the income year, plus a quick sale adjustment if you bought and then subsequently sold units in the same fund during the year.
Cumulative Value (CV) – Closing value plus gains, minus opening value plus costs. Gains include dividends, sale proceeds and tax credits. Costs include the cost of buying units, along with foreign income tax paid by you directly on income of the FIF
Once you have selected a method, and calculated your taxable income, you will need to pay tax on that income at your marginal tax rate. You also must apply the same calculation method across all your FIF investments for the year E.g. you can’t use the FDR method on one fund, and CV on another fund.
The FIF rules appear daunting compared to investing in PIE funds, but can actually work out in your favour. For example:
- Using the FDR method, your taxable income is capped at 5% of your investment’s value, even if you make a return of 10% for example.
- Using the FDR method, if you make additional contributions to your investment over the year, you are only taxed on the opening value of your investment as at 1 April.
- If you make a very low or negative return, it is advantageous to use the CV method, which could result in low or no tax to pay on your investment.
De minimis exemption (investing less than $50,000)
If you hold less than $50,000 in FIF investments, you are a de minimis investor. De minimis investors can apply the de minimis exemption and simply pay tax on the actual dividends from their FIF investments, rather than following the FIF tax rules. The dividends must be declared in a tax return, however, if you earn less than $200 in overseas dividends and interest, then you may not need to file a return for this income.
Using the de minimis exemption is probably simpler than following the FIF rules. But one quirk of AUTs may mean that using the exemption could result in a tax disadvantage. AUTs are required to pay out any of their realised capital gains as dividends. Which means you could be taxed on capital gains that you wouldn’t usually be taxed for!
You don’t have apply the de minimis exemption if you’re a de minimis investor. You can choose to apply the above FIF rules (particularly if they work out in your favour), but if you do so, you must use them for the next four years.
ASX shares exemption
If you invest in certain ASX listed Australian companies (typically those who pay franking credits with their dividends), the FIF tax rules do not apply to them. You will still need to pay tax on their dividends, but unlike imputation credits, New Zealanders cannot claim franking credits. Check here to see if the ASX listed company you own is exempt.
Overseas dividends may already have some foreign tax deducted. E.g. Shares you buy on Hatch would have 15% US tax deducted from their dividends. You can keep your dividend statements, and claim this back via your tax return, as there are provisions to avoid double taxation between NZ and other countries.
Tax on FIF investments need to be declared and paid in New Zealand Dollars. The most common method to convert foreign amounts to NZD is to use the actual exchange rate on the day of each transaction. There are other methods that the IRD accepts to convert currency, but the use depends on your circumstances (check with a tax professional for more info).
KPMG – Tax on Offshore share investments (PDF)
InvestNow – Going global – Tax tips and traps for local investors
InvestNow – InvestNow Tax Guide (PDF)
IRD – Foreign investment fund calculator
IRD – Foreign investment fund rule exemptions
IRD – Foreign currency amounts – conversion to New Zealand dollars
KiwiSaver funds are all multi-rate PIEs, so are taxed at your PIR. Your KiwiSaver provider will handle all the taxes for you, so you don’t have to do anything apart from making sure they have your correct PIR.
The use of incorrect PIRs has been in the news in recent months, as the IRD have been warning hundreds of thousands of taxpayers to correct their PIRs. Those using a PIR too low have been hit with a tax bill, while those using a PIR too high are not entitled to a refund of their overpaid tax.
RNZ – KiwiSaver tax rate errors: Up to 450,000 New Zealanders overtaxed
F. Residential Property
Tax on residential property is a step up in terms of complexity, so this is just an extremely basic and simplified overview – there are heaps of rules and caveats I won’t cover here. There are two ways you can make money from property – rental income and capital gains.
Rental income from renting out a room or a home (including through Airbnb like services) is taxed. You can deduct expenses that relate to the rental from your income, such as insurance, rates, maintenance, and property management fees.
There some exceptions where you do not have to declare any rental income. But if you choose not to declare the rental income, then you cannot deduct expenses from your income.
- Holiday home – If your holiday home falls under the mixed-use asset rules, you do not have to declare the rental income under certain circumstances such as earning less than $4,000 in rental income during the year.
- Boarders – you do not have to pay tax on boarding income of up to $270 a week for up to two boarders, and $222 for a 3rd and 4th boarder (this amount is adjusted every year). Income tax applies when you exceed these thresholds.
To declare your rental income, you must complete an IR3R form for each rental property, as part of your tax return, and keep any records of income and expenses for 7 years.
Similar to shares, capital gains on residential property are generally not taxed. But there are a few cases where capital gains are taxable:
- You bought the property with the intention to resell it for a profit
- You have a history of buying and selling property which could see you considered a property dealer
- You are in or associated with the building industry
- The ‘Bright-Line test’ – You sell within 5 years of purchase. Your family home is usually excluded from the Bright-Line test
Like capital gains on shares, capital gains on property is taxed at your marginal tax rate.
Being a relatively new asset class, the taxation rules on cryptocurrency is relatively undeveloped. Cryptocurrency is treated as property for tax purposes, and whether it’s taxable, depends on the purpose you acquire them for:
Where you acquire cryptocurrency for the purpose of disposal (selling or exchanging it) the proceeds you make from selling it are taxable. Bitcoin and similar cryptocurrencies generally don’t produce an income stream or provide any benefits, except when they’re sold or exchanged. This strongly suggests that cryptocurrencies are generally acquired with the purpose to sell or exchange them.
So based on that statement, IRD are likely to view any gains on cryptocurrency as taxable. In addition, tax doesn’t just apply when you cash out to NZD, but when you make a disposal that results in a realised gain or loss – such as trading one crypto for another, or a crypto to another fiat currency like USD.
IRD – Questions & answers: Cryptocurrency and tax
3. Tax Logistics
A. Tax Year
For taxation purposes, a year runs from 1 April to 31 March of the following calendar year. For example, the 2020 tax year runs from 1 April 2019 to 31 March 2020.
B. Income Tax Assessment
Within a few months of the end of the tax year, the IRD may automatically issue you an income tax assessment. The assessment is based on your income that the IRD already knows about. This income could be (copied from the IRD):
- salary or wages
- schedular payments
- income-tested benefits
- interest or dividends
- taxable Maori authority distributions
- benefits under an employee share scheme.
The Income Tax Assessment determines whether you have a tax bill or tax refund for the year, correcting any under or over payment of tax (e.g. PAYE and RWT) you may have made during the year. If you receive a tax bill, this usually must be paid by the 7th of February of the following year.
IRD – Income tax assessments
C. Tax returns
Most salary and wage earners do not have to complete a tax return, as all of their taxable income will be covered by the above Income Tax Assessment. However, a tax return is required if you need to declare some source of income that the IRD isn’t aware of yet. This could be income from (copied from the IRD):
- rental property including Airbnb and Bookabach
- ‘under the table’ cash jobs
- an estate, trust or partnership.
There are other reasons you may need to complete a tax return, such as leaving or arriving in New Zealand part-way through the tax year.
The tax return form is known its the IR3, which you can also complete online. You need to file it by the 7th of July following the end of a tax year, and after filing, the IRD will come back to you with a tax bill or refund.
If you don’t need to file a tax return, there are some cases where it may be beneficial for you to still do so. For example, to claim back excess tax from listed PIEs and dividends.
Inclusions and Exclusions
Unfortunately, if you need to complete a tax return, you need to declare all your taxable income in the return, even if your tax liability for this income has already been covered by an Income Tax Assessment. PIE income can usually be excluded, unless you wish to claim back any excess tax paid on listed PIEs.
Have I scared you off?
It’s understandable if you read the above and have been put off by the complexity of tax on investments. This is not tax advice, but if you’re an employee, and stick to the following investments, then chances are all your tax will be paid automatically and you won’t have to file a tax return:
- Bank deposits, bonds, peer to peer lending
- Listed PIEs
- Multi-rate PIEs
You would only have to file a tax return if you invest in the following (or if you are required to file a tax return for some other reason, like being self-employed):
- Things that would make you liable for capital gains such as cryptocurrency, or trading shares and property
- Overseas and FIF investments
- Renting out property
But I still would not be put off too much – it is very achievable to complete the return yourself, and if you need professional help to file your return, the fees you pay can be deducted as an expense.
Phew, that was a mission to write up, and I am just scratching the surface of tax in this article. If you got this far hopefully your brain is still intact, and that this article has given you an idea of what to expect regarding your tax implications when investing. I’d say the most important things to know are:
- Know your RWT rate and PIR, and make sure your investment provider has your correct rates
- Know which tax rate applies for each type of investment, so you can choose one that better fits your personal circumstances
- Know when you need to file a tax return, and when you don’t
- Seek professional advice – there may be rules and caveats unique to your personal circumstances
- Despite its complexity, don’t let tax put you off investing. In many cases tax is simple
The content of this article is based on my personal opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with a qualified financial advisor before making any investment decisions.