In August 2024’s What’s been happening in the markets article we cover how interest rates have changed in the past month, explore whether you should invest in Foundation Series’ upcoming funds, and look at what IRD has to say about how shares are taxed.
This article covers:
1. Product updates
2. Market Movements
3. What we’ve been up to
1. Product updates
Interest rate cuts
On the 14th of August, the Reserve Bank of New Zealand cut the Official Cash Rate (OCR) from 5.50% to 5.25%, thanks to inflation easing and a weakening economy. This has provided a bit of relief for people with mortgages – Floating rates have come down by 0.25%, while 1 year fixed rates have come down from around 6.90% to 6.50% over the last month.
But don’t forget it’s bad news for savers, as savings accounts and term deposits have had their interest rates cut as well. Here’s what’s been happening with some of NZ’s highest interest savings products:
- Squirrel On-Call – 5.25% to 5.00%.
- Sharesies Save – 4.60% to 4.35%.
- Booster Savvy – 5.00% to 4.75%.
- Rabobank Premium Saver – 5.25% to 5.00%, but we think this can be an inferior product as you need to increase your account balance by $50 per month, otherwise your rate will only be 2.50%.
- Kernel Smart Saver – Currently running a promotion with a 5.25% rate for a limited time only (was previously 4.80%).
New funds coming for Foundation Series
Foundation Series is a fund manager most well known for their low cost index funds which fully invest in US index funds. These are the:
- Foundation Series US 500 Fund, which invests in VOO (Vanguard S&P 500 ETF)
- Foundation Series Total World Fund, which invests in VT (Vanguard Total World ETF)
Foundation Series have recently announced that they’re working on adding at least two new funds, though no release date has been announced.
Nasdaq-100 (QQQ)
The first new fund will invest in QQQ (Invesco QQQ Trust), which tracks the Nasdaq-100 index. This index is made up of the 100 largest non-financial companies listed on the Nasdaq stock exchange.
Many investors are attracted to QQQ by the fund’s heavy exposure to tech related companies, particularly the ‘Magnificent 7’ companies (Microsoft, Tesla, Apple, NVIDIA, Amazon, Meta, and Alphabet) which make up ~43% of the fund. The problem is that other popular index funds already invest heavily into the ‘Magnificent 7’ (as well as most of the other 93 companies in the Nasdaq-100). So if you already invest in funds such as the S&P 500 or Total World, you don’t need to invest in QQQ to get exposure to these tech companies. Take the S&P 500 example which already has a roughly 32% weighting towards the ‘Magnificent 7’.
Some investors are also attracted by the performance of QQQ. Over the last 5 years QQ has delivered a return of about 140%, while VOO has delivered a return of around 85%. However, this is past performance, and just because a fund performed better in the past doesn’t mean its future performance will be better.
However, there are a couple of reasons why you might choose to invest in this fund:
- You intentionally want to increase your portfolio’s exposure to the companies or sectors contained in QQQ.
- You prefer QQQ’s narrower focus or sector mix over the broader index funds.
Dow Jones U.S. Dividend 100™ (SCHD)
The second new fund will invest in SCHD (Schwab US Dividend Equity ETF), which tracks the Dow Jones U.S. Dividend 100™ Index. This index is made up of 100 high-dividend-yielding stocks in the US.
Above we argue that most people do not need to invest in QQQ, so how about SCHD? Again, you would probably not be getting as much extra diversification as you might be expecting by investing in this fund. Many of the SCHD’s underlying companies can be already be found in funds like VOO and VT.
By investing in SCHD, you’d be tilting your portfolio towards higher dividend paying companies. SCHD has a dividend yield of around 3.4% vs 1.3% for VOO. This may be good thing if you’re intentionally after higher dividends, but remember, higher yields typically means lower capital growth and lower total returns overall.
Further Reading:
– Investing for passive income – The danger with dividends
IRD provides tax guidance on capital gains on shares
Tax on shares has always been a bit of a grey area, especially when it comes to capital gains. Sometimes capital gains were tax free, but other times they were taxable. So with the recent rise of online investment platforms, the IRD has released some draft guidance hoping to bust some of the misconceptions around tax on shares and clarify investors’ tax obligations. Here’s some of the main points from the guidance document:
Capital gains on shares are taxable if you bought with the “dominant purpose of disposal”. In other words, if the main reason you bought the shares was to sell them later for a profit. The following example is provided:
In early 2024, Charlie used an online investment platform regularly. Charlie bought and sold a few shares every now and again with an eye on sales profits. He didn’t consider dividend policies, and preferred shares in companies that reinvested profits rather than paying dividends. Charlie was prepared to take risks and searched for companies on the platform by applying a “highest price change” filter. Charlie would sell shares when he considered the price was high.
The nature of the shares acquired, the length of time held, and the pattern of activity indicate that Charlie acquired shares for the dominant purpose of disposal. Accordingly, the amounts Charlie receives from these sales will be taxable
There is no set amount of time shares are held for sales to be taxable (though time is still a factor the IRD may consider in determining whether or not your gains are taxable). For example, your capital gains don’t suddenly become tax free when you’ve held your shares for over a year. It’s the reason or purpose you bought the shares that primarily matters. For example:
In 2021, Olive started using an online investment platform. She used a filter to sort various New Zealand companies by the highest price change, as she was looking to earn extra money by selling shares for profit.
After a few months Olive changed her mind and decided to hold on to her shares for a long-term investment.
Two years later, Olive had a change of circumstances and had to sell the shares. Because Olive bought her shares for the purpose of selling them, the amount she receives from the later sale of the shares will be taxable. It is Olive’s purpose at the time she bought the shares that determines whether sales are taxable.
Capital gains on shares are non-taxable if you bought them for the purpose for:
- Receiving dividend income.
- Receiving voting interests or other rights provided by shares.
- A long-term investment, growth in assets, or portfolio diversification (other than
situations where, at the time of acquisition, this is planned to be achieved through sale). See below for an example:
Steve started using an online investment platform to invest in shares. He wanted to invest in ethical companies that will still provide a good return in some way. He undertakes research before purchasing shares, focusing on the companies’ ethical and sustainability policies as well as dividend history and the growth in share prices over the last few years.
At the time of purchase, Steve is not certain about how long he will hold the shares for. Two years later, he decides to sell his portfolio and sells the shares for a profit. The sale of these shares is not taxable. Steve had several purposes for buying the shares, none of which were dominant. He could show this through his research, and what he said his purpose was is consistent with the types of shares that he bought.
It’s great that IRD has provided clarity that even if a company doesn’t pay dividends, the capital gains aren’t necessarily taxable:
Logan owned a large share portfolio that he had been adding to over the years. Some shares paid regular dividends that were re-invested, but most investments were in high growth shares that had not paid dividends (at least on any regular basis). He had recently retired and was living off his superannuation and the occasional maturity of term deposits.
Logan wanted to build up his asset profile so he would have an inheritance he could eventually pass on to his children and grandchildren. Logan did not think of his share portfolio as something he would sell, and the investments he made were consistent with that.
Logan had unexpected medical issues and sold some of his shares to fund expenses. The sale of those shares is not taxable. Logan bought the shares with the purpose of building up a portfolio that would not necessarily be sold. His change of circumstances does not alter that purpose on acquisition.
A couple of other things to note:
- Dividends on shares are usually taxable.
- If you are subject to FIF tax rules (i.e. invest $50,000 or more into foreign shares), then FIF tax typically overrides the above tax rules.
- The above guidance excludes tax treatment on PIE funds (including KiwiSaver funds). These funds calculate and pay your tax liability on your behalf.
To be clear tax rules have not changed, and this guidance just aims to improve clarity of the rules to investors. While it’s great the IRD have taken this initiative, the rules are arguably still unclear – don’t most people buy shares with the intention of selling them for a profit, even if the shares are being held long-term? But as a draft document, it’s subject to change and hopefully we get even more clarity on the matter when the final version is released.
Further Reading:
– What taxes do you need to pay on your investments in New Zealand?
2. Market Movements
Here’s how the markets have performed in August 2024 (as at 30 August), in both their local currencies and in NZ dollar terms:
| Local currency | NZD | |
| NZ shares (S&P/NZX 50) | 0.34% | 0.34% |
| Australia shares (S&P/ASX 200) | 0.00% | 0.53% |
| US shares (S&P 500) | 1.26% | -3.79% |
| Japan shares (Nikkei 225) | -1.16% | -1.52% |
| UK shares (FTSE 100) | 0.49% | -1.98% |
| Bitcoin | -8.30% | -12.87% |
Overall we finished the month largely flat despite the high volatility at the start of the month where markets freaked out over recession fears and rising interest rates in Japan. Markets bounced back quickly from the downturn, which goes to show the importance of staying the course (i.e. not stopping your investments or panic selling) through these events. Downturns are often short-lived especially within the context of a long-term investment timeframe of say 10-20 years.
Here are the year-to-date results:
| Local currency | NZD | |
| NZ shares (S&P/NZX 50) | 5.75% | 5.75% |
| Australia shares (S&P/ASX 200) | 6.60% | 7.18% |
| US shares (S&P 500) | 17.24% | 18.29% |
| Japan shares (Nikkei 225) | 15.49% | 13.37% |
| UK shares (FTSE 100) | 8.74% | 13.71% |
| Bitcoin | 40.43% | 41.69% |
3. What we’ve been up to
Despite a couple of major market events this month (being the OCR cut and market volatility) we haven’t made any changes to our finances:
- Our floating mortgage rate has decreased from 5.88% to 5.63%. This reduces our mortgages repayments by about $13 per week, though this isn’t enough to have any impact on our household budget.
- We’ve kept our savings/cash fund products the same despite the interest rates decreasing on these. They’re still necessary for storing funds for our short-term goals.
- We’re not trying to time the market. We’re not buying more and not buying less shares during this time. We’re simply continuing to invest the same amount each week.
Outside of investing we’ve been doing a lot of baking (mainly bread), cooking, gardening, and cleaning around the house. Food highlights for the month include Daily Bread (particularly the Stonefields store for the nice garden environment), Middle Eastern Morning (Mount Roskill), and PieFee (Karangahape Road).
Thanks for reading and your ongoing support!
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Disclaimer
The content of this article is based on Money King NZ’s 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 an authorised financial adviser before making any investment decisions.
Weird choice, QQQ is too tech and country concentrated for my liking and SCHD meh. Wounder how many people that have VOO, VT or Growth funds also put funds in QQQ/SCHD not knowing the overlap. Russell 2000 or VTI would have been a better option or maybe some commodity ETF’s.
QQQ probably got requested by a lot of investors, but yes, SCHD is a weirder choice but maybe to attract the dividend investors. Unfortunately we will see a lot of investors already in the broad index funds also pick up QQQ/SCHD looking for “more diversification” or just “taking a punt” in the new funds. It’s investor behaviour we sadly see everyday.
The capital gains on sale of shares is still horribly opaque in my view. If i add to shares throughout my life, and at some stages i think i’ll hang on to them for my kids, and at other stages that i’ll be selling them down in my retirement, how can i possibly say what my intent was, and for which purchases i had which intent? I also wonder why they used some of those bizarre examples. If i buy shares over a 30 year period with the express intent of slowly selling them off to fund my retirement (i. E. A far more likely situation than buying them to hold forever for some reason), do i pay tax? I assume yes?
Honestly the rules just need to change rather than fluffing around with guidance that isnt legal accepted anyway.
Yes, lots of situations are still unclear. Though perhaps in your example, you could argue that there wasn’t a dominant purpose for buying the shares – i.e. the reason you invested was to build a diversified portfolio to accumulate assets for retirement (in which you have no clear plan/timeframe for selling the shares) AND hold forever for your kids. That scenario does not appear to be taxable, similar to the third example in our article.
It brings to mind a comment by David Mitchell (the comedian) discussing the british tax system, who said he saw one aspect of it as a tax on honesty. I feel like in a number of cases that is what can happen here. You can state your purpose was whatever you want, to avoid paying tax. The only people that will pay tax are those that are either ridiculously obvious (i. E. Share traders, etc.) and those that SAY they intended to sell for a profit. It incentivises people to be dishonest which is a bit crazy really.
That’s right, you can easily lie about your intentions to avoid tax. But there are limitations to this, for example if you say you intend to hold forever, but your buying and selling activity suggests otherwise. In this case the IRD can penalise you for unpaid tax or tax avoidance, so there’s still some incentive to be honest and not abuse the tax system.
I’m assuming that if you change your strategy even for “good” reasons, let’s say you discover that a specific company/fund doesn’t align with your ethical values, which could make you sell all of shares and put somewhere else, would also be taxable?