Foreign Investment Tax Surprises: How FIF Rules Can Catch Investors Off Guard

What Is the FIF Regime?

New Zealand’s Foreign Investment Fund (FIF) rules tax certain offshore investments held by New Zealand tax residents once the total cost of those interests exceeds NZD 50,000. Typical FIF investments include:

• Shares in foreign companies (excluding many ASX-listed Australian companies)

• Units in foreign managed funds and ETFs

• Some interests in foreign superannuation and similar pooled vehicles

If you are a New Zealand tax resident and your foreign share or fund holdings are above the NZD 50,000 threshold, and no exemption applies, you generally must calculate FIF income using one of the statutory methods. For most individual investors, the relevant methods in practice are:

• Fair Dividend Rate (FDR) – the default method, deeming a 5% return on opening value

• Comparative Value (CV) – based on year-to-year movement in value plus income received

Other methods, including the cost method, deemed rate of return and attributable FIF income, usually apply in narrower situations.

Fair Dividend Rate (FDR) in Plain English

Under FDR, you are taxed on 5% of the opening market value of your offshore portfolio for the income year, regardless of:

• Whether your portfolio actually earned 5%

• Whether you received any dividends in cash

• Whether the portfolio rose or fell in value

That 5% deemed amount is treated as income and taxed at your marginal tax rates.

Why FIF Often Feels Unfair

The core criticism of FIF is that it taxes deemed income rather than your real-world results. This can hurt conservative or unlucky investors, and it can be particularly harsh for migrants with inherited shares.

1. Tax on Deemed Income When You Have Real Losses

Consider an investor who starts the tax year with NZD 900,000 in foreign shares:

• Markets fall 10% during the year, so the portfolio ends at NZD 810,000 – a real loss of NZD 90,000

• There are no dividends or other income

Under FDR:

• Deemed income = 5% of NZD 900,000 = NZD 45,000

• The investor has actually lost NZD 90,000 and received no cash, but still faces tax on NZD 45,000 of notional income

For many investors, especially those under NZD 1,000,000, this is very hard to accept: the tax bill arrives in a year when they feel poorer.

2. No Real Choice to Use Ordinary Trading Rules

Under ordinary rules, a genuine share trader on revenue account can:

• Return actual trading profits as income

• Claim actual trading losses as deductions

But if you are over the FIF threshold and the investment is a FIF interest, the law generally requires you to use a FIF method, such as FDR or CV, rather than ordinary trading rules. That means:

• You cannot simply opt out of FIF because you are an “active trader”

• You may not get full recognition of large real losses, even if you have detailed trading records

This lack of symmetry between gains and losses is another source of perceived unfairness.

3. Compliance Cost and Complexity

The FIF regime also has a heavy compliance burden:

• You need reliable opening values each year

• You may require historic transaction histories, corporate actions data and foreign exchange rates

• Some overseas institutions provide only limited reporting, making accurate FIF calculations difficult

For many small and medium-sized investors, the accounting cost of complying can feel disproportionate to the portfolio size.

Migrants, Inherited Portfolios and FIF

The fairness concerns are magnified for migrants and returning New Zealanders who bring existing offshore portfolios with them, particularly if those portfolios were inherited.

Inherited Offshore Shares

From a New Zealand perspective:

• There is generally no tax when you inherit property, including foreign shares

• However, once you become an NZ tax resident and any transitional exemption ends, those inherited shares can be treated as FIF interests if they exceed the NZD 50,000 threshold

For FIF purposes, the relevant “cost” or value of the inherited shares is determined under the rules in the Income Tax Act and Inland Revenue guidance, for example by using market value at a particular reference point where actual cost is not available.

The key fairness issue is that you may not have paid anything for these investments, but you are still taxed annually on a deemed return based on their potentially substantial value.

Example: Inherited NZD 800,000 Portfolio

Suppose a migrant inherits foreign shares worth NZD 800,000 while living overseas, then later becomes an NZ tax resident:

• After any transitional period expires, the portfolio is still worth around NZD 800,000

• Under FDR, deemed income = 5% × NZD 800,000 = NZD 40,000

If the portfolio actually:

• Pays dividends of only NZD 12,000

• Falls in value to NZD 760,000 over the year

The investor effectively lost NZD 40,000 in capital and received NZD 12,000 in cash, yet is taxed as if they earned NZD 40,000. This is a common situation for migrants with low-yield, unbalanced or under-performing legacy portfolios.

Transitional Tax Residency – the Four-Year Foreign-Income Exemption

New Zealand’s transitional tax residency rules provide a critical planning window for new migrants and returning New Zealanders.

Who Qualifies?

Broadly, you may qualify if you:

• Become tax resident in New Zealand

• Have been non-resident for at least 10 continuous years before that

• Have not previously used the transitional resident exemption

The exact conditions and interaction with the residence rules should always be checked.

What Do You Get?

A qualifying transitional resident receives a temporary exemption – effectively up to 48 months, or around four income years – from New Zealand tax on most foreign-sourced income, including:

• Foreign dividends and interest

• Most foreign rental income

• FIF income from foreign shares and funds

Foreign employment income and some service-related income are excluded and remain taxable in New Zealand.

During the exemption period, you are treated, for these types of income, almost as if you were still non-resident.

Using the Transitional Period Wisely

For migrants and returnees with portfolios under NZD 1,000,000, this is often the best time to:

• Map your offshore position – list all foreign bank accounts, portfolios, funds, pensions and inherited assets

• Restructure and simplify – consider selling complex or unsuitable assets while gains are exempt, consolidating accounts or shifting into more flexible investments

• Plan for the end of the exemption – decide which assets to retain offshore once FIF applies and whether to move part of your capital into NZ-domiciled structures, such as PIE funds, which are outside the individual FIF rules

The exemption is time-limited. Leaving planning until the final year, or after it ends, can be a costly mistake.

New Migrant Concession: the Revenue Account Method (RAM)

Recognising the difficulties migrants face with FIF, the Taxation (Annual Rates for 2025–26, Compliance Simplification, and Remedial Measures) Act introduces an optional Revenue Account Method (RAM) for certain taxpayers.

What Problem Is RAM Solving?

Policy work on the FIF rules has highlighted that new migrants:

• May face large FIF charges on unrealised gains or even in loss years

• Can struggle with valuation and data requirements across multiple foreign institutions

• Perceive New Zealand as less attractive because the FIF regime feels out of step with how they actually earn and access returns

RAM is intended to ease these issues and make New Zealand more attractive for globally mobile individuals.

How RAM Works in Broad Terms

In broad terms:

• RAM is an optional method for calculating FIF income on certain foreign equity investments

• It applies on a realisation basis rather than deeming a flat 5% annual return

• Taxation under RAM focuses on:

  • Dividends actually received

  • Realised gains or losses when those investments are disposed of

Only a proportion of realised gains and losses is brought into account through a discount factor, which reduces effective taxation on capital-type returns and provides more symmetry with losses.

Eligibility is targeted. RAM is expected to apply only to:

• Individuals who became NZ tax resident on or after a specified date, for example 1 April 2024

• Those who were non-resident for a minimum period before becoming resident

• Certain transitional residents and some family trust situations in defined circumstances

The detailed eligibility conditions, elections and interaction with other methods are set out in the legislation and supporting guidance, and professional advice is essential.

Example: NZD 900,000 Migrant Portfolio Under RAM

A new migrant ends their transitional period with foreign shares worth NZD 900,000 and qualifies for RAM. In a particular year:

• They receive dividends of NZD 18,000

• They sell some holdings for a gain of NZD 30,000

Under a simplified view of RAM:

• FIF income would be based on the NZD 18,000 dividends plus an adjusted portion of the NZD 30,000 gain after applying the discount factor

Crucially:

• If they do not sell, there is generally no annual tax on unrealised gains

• They are not taxed on a flat 5% deemed return on the full NZD 900,000 every year

For many migrants with portfolios below NZD 1,000,000, this better aligns tax with actual cash flows and realised outcomes, and it avoids some of the harshness of FDR.

Practical Guidance for SME and Migrant Investors

For small and medium-sized clients holding foreign investments, especially migrants and returning New Zealanders, there are several key actions to consider.

1. Confirm Your Tax Residency and Transitional Status

• Determine when you became New Zealand tax resident

• Check if you qualify as a transitional resident and confirm when your four-year foreign-income exemption starts and ends

• Be aware that certain elections or choices can inadvertently end your transitional status early

2. Assess Whether FIF Applies

• List all foreign shares, funds and similar interests

• Determine the cost or relevant value for each and total them

• If you exceed NZD 50,000 and are outside the transitional exemption, assume FIF applies and seek advice on method selection

3. Make the Most of the Transitional Period

• Use the four-year window to tidy up legacy, inherited or ill-suited portfolios

• Consider whether to realise gains while they are exempt or shift into structures that will be simpler once FIF kicks in

• For inherited portfolios under NZD 1,000,000, this can be the difference between manageable ongoing tax and periodic FIF shocks

4. Explore RAM if You Are a New Migrant

• If you became tax resident after the relevant start date and have been non-resident for the required period, review whether you are eligible for the Revenue Account Method

• Compare:

  • Tax under FDR – 5% of opening value every year

  • Tax under RAM – dividends plus a portion of realised gains or losses

• In many cases, RAM will produce a result that better reflects your actual investment experience and provides fairer treatment of losses

5. Get Advice Early

The harshest outcomes generally occur when:

• Investors learn about FIF only after assessments or audits

• Records are incomplete or hard to obtain

• The transitional residency window has already closed

Early, specialised advice can help you:

• Avoid unexpected tax bills on deemed income

• Structure your affairs to take advantage of transitional residency and RAM where available

• Keep compliance costs proportionate to your portfolio size

New Zealand’s FIF rules are complex and, for many, intuitively unfair because they tax notional returns. But with a clear understanding of the regime, proactive use of the four-year transitional residency rules, and careful consideration of the new Revenue Account Method for eligible migrants, it is possible to significantly reduce the mismatch between tax and economic reality – and to make offshore investing more sustainable for everyday SME and migrant investors.

Contact Greenlane CA Limited

• Email: info@glca.co.nz

• Phone: +64 9 522 5182

• Website: www.glca.co.nz

• Address: 97 Great South Road, Greenlane, Auckland 1051

Disclaimer

This newsletter is published by Greenlane CA Limited for informational purposes only. The content provided herein is of a general nature and does not constitute professional tax, accounting, legal, or financial advice. While every effort has been made to ensure the accuracy and completeness of the information contained in this newsletter, Greenlane CA Limited makes no representations or warranties, express or implied, as to the accuracy, reliability, completeness, or currency of the information.

Readers should not act or refrain from acting based solely on the information in this newsletter without first seeking professional advice tailored to their specific circumstances. Tax laws and regulations are subject to change, and the application of these laws depends on the particular facts and circumstances of each case.

Greenlane CA Limited, its directors, employees, and agents accept no responsibility or liability for any loss, damage, cost, or expense, whether direct, indirect, consequential or otherwise, incurred by any person as a result of relying on the information contained in this newsletter, or any errors or omissions therein, howsoever caused.

For advice specific to your situation, please contact Greenlane CA Limited directly.