New Zealand investors are poised to increase their after-tax returns by tens of thousands of dollars over time due to a change in the Foreign Investment Fund (FIF) regime. The government’s proposed adjustment will allow individuals to invest up to $100,000 directly in offshore assets before being subject to the regime’s rules. This change is expected to prompt many investors to restructure their portfolios to capitalize on the eased regulations.
Currently, investors placing up to $50,000 directly in offshore assets pay their personal marginal income tax rate on investment income, potentially as high as 39%. Those investing more than $50,000 in offshore assets typically do so indirectly through Portfolio Investment Entity (PIE) funds. PIE fund investors are taxed up to 28% on income like dividends but also incur charges from fund managers who must pay tax on a portion of their investments to comply with the FIF regime. This results in a greater tax burden for PIE fund investors compared to those investing less than $50,000 directly.
The upcoming change means investors can double the amount they invest directly in offshore assets before the FIF regime applies. This allows for a more tax-efficient investment approach. Kernel chief executive Dean Anderson stated that saving 0.5% to 0.7% per annum on costs compounds materially over 20 or 30 years, significantly increasing the money in an investor’s pocket.
Fund managers anticipate a shift in investment strategies. Anderson believes many Kernel users will adjust their portfolios, investing up to $100,000 in offshore assets, potentially reducing their investments in PIE funds or the NZX. Aurellan Asset Management director Anthony Edmonds shares this view, despite his long-held belief that PIE funds are the best structure for New Zealand investors. Edmonds described the new opportunity as “simply too good to ignore.”
The Commissioner for Inland Revenue and fund managers like Anderson and Edmonds caution that certain complexities, referred to as “fishhooks,” exist within the new rules. Investors should consider these details when adjusting their strategies. While the direct investment strategy offers tax savings, Anderson noted that tax efficiency is only one of several factors to consider when constructing an investment portfolio.
The full implications of this policy adjustment on broader investment trends and the performance of PIE funds and the NZX remain to be seen. Investors will need to weigh the tax advantages against other portfolio considerations, including diversification and risk management. The extent to which investors reallocate capital to direct offshore holdings will be a key development to monitor.
Uncertainty remains regarding the specific details of the “fishhooks” mentioned by officials and fund managers. Investors should seek professional advice to fully understand the nuances of the updated FIF regime and how it applies to their individual financial situations. The market will observe how fund managers adapt their offerings and guidance in response to this significant regulatory change.