An anticipated change to the foreign investment fund (FIF) income calculation rules was confirmed with the release of the August tax bill. This change being the introduction of a new FIF income calculation method, the revenue account method, also known as RAM.
A feature of the FIF rules is that tax is essentially capped at 5% of the opening value (or cost for unlisted shares) of the shares, subject to some adjustments. Although this looks favourable to a New Zealand resident investor, from a potential migrant’s perspective this can appear quite burdensome where they have a large portfolio of foreign shares, or where they are also subject to tax on their foreign shares. Also, as the existing FIF rules tax unrealised amounts, the tax can be difficult to finance given there is no necessary real cash gain.
The RAM method seeks to address this by allowing certain FIF interests held by new migrants (and some returning kiwi’s) to be taxed on a realisation basis. That is dividends and gains and losses (discounted by 30%) will be taxed at the person’s marginal rate. Also, by only taxing realised amounts there is potential that foreign tax credits arise where the shares have been taxed on a realisation basis overseas.
If you want to learn more about the RAM method or see if you are eligible, please get in touch with us. We are always happy to help.