IMPORTANT clarifier due to recent media confusion over fair dividend rate
Dunne: many investing in overseas companies better off under FDR rules
Recent media reports have revealed confusion about how individual investors in overseas companies are taxed under the new fair dividend rate (FDR) rules that came into force in 2007, Revenue Minister Peter Dunne said today.
"The FDR ensures that offshore investments are taxed on a deemed reasonable dividend yield of 5% of their value.
"That means individual investors in overseas companies are taxed on a maximum of 5% of the value of their investments in good years, when they increase in value," Mr Dunne said.
"For example, an individual with portfolio investments of $100,000 that increase 10% in value will be taxed on deemed income of $5000. For someone on a 38% top tax rate, tax owing on that $5000 will be $1900.
"In bad years, when there is an investment loss, the individual investor pays no tax on the investments.
"It is a slightly different story for investments in overseas companies via managed funds such as KiwiSaver," he said.
"In both good and bad years, investment income is taxed on 5% of the investments' value. To keep things as simple as possible for managed funds, the new rules do not distinguish between years of increase or loss in value. However, investors in managed funds have the advantage of being taxed at a maximum rate of 30%.
"Many individual investors are better off under the new rules mainly because when things go badly they do not pay tax on their investments, even if they receive a dividend. Under the old rules, individuals paid tax on their dividends even if their investments went down in value. For example, someone whose $100,000 investments went down 10% in value but who received a $3000 dividend yield from the investments had to pay tax on that $3000. Under the new FDR, that individual pays nothing.
"While not perfect, the new rules are much fairer than the ones they replace," Mr Dunne said.
He said the old rules taxed offshore share investments unevenly, according to the country invested into and the intentions and purpose of the investor.
"In particular, the old rules disadvantaged savers who invested offshore through actively managed funds because they were taxed on all their gains at 33 percent," Mr Dunne said.
Contact: Mark Stewart, Press Secretary, +64 21 243 6985