Foreign Investment Fund reforms to progress

The Government has announced it will be proceeding with changes to the Foreign Investment Fund (“FIF”) tax rules, consulted on last year, to address concerns around how those rules can penalise migrants to New Zealand with offshore investments.

In a nutshell, the current FIF methods tax deemed income each year from offshore shares. This can be regardless of the actual performance of the investment (including if ultimately realised for a loss), the availability and volatility of investment values (on which the deemed income is calculated) and whether there is cash-flow to pay the tax (the current rules tax on an unrealised basis). This is particularly an issue for unlisted shares, such as shares in start-ups. A related issue is the potential for double tax, where the offshore country, such as the United States, may also seek to tax the FIF investment (e.g. on a citizenship basis).     

New FIF calculation option

The Government is proposing a new revenue account method option which would tax the actual (not a deemed) return and defer the taxing point until a realisation event occurs, such as the sale of the relevant shares. By taxing on a realisation basis, rather than deemed income annually, this is also expected to help with the double tax issue by making it easier for investors to claim a tax credit overseas for tax paid in New Zealand.

Inland Revenue has published a fact sheet to explain how the proposed changes will work.  While the fact sheet provides additional details absent from the Government’s initial press release, many additional details have yet to be clarified. Further information is expected to be released alongside the implementing legislation (likely to be in August).

Discount on gains (and losses)

Under the revenue account method, only 70% of any realised gain would be taxed. If shares are disposed of for a loss, 70% of the loss would be available to offset against gains under the revenue account method arising in the same or a future year. Revenue account method losses would not be available to offset FIF income calculated under other methods (or against any other income).

Dividends would be taxable in full on receipt at marginal rates. 

Qualifying for the revenue account method

According to the fact sheet, the new FIF method will be available to new migrants who become “fully tax resident” in New Zealand on or after 1 April 2024. This means migrants who qualified for the transitional residence concession from 1 April 2020 would generally be able to access the rules. Returning New Zealanders, who do not qualify as transitional residents (e.g. because they have not been absent for 10 years or may have already accessed the exemption), may also be able to access the rules if returning on or after 1 April 2024. To qualify they will need to have been absent for a sufficient length of time, but the period is yet to be determined. 

Application date

The new rules are proposed to apply from the 2026 tax year (i.e. 1 April 2025) onwards, for offshore shares in unlisted companies (but excluding unlisted entities whose main investment is listed entities) that were acquired prior to relocating to New Zealand. The rules would also apply to unlisted shares acquired after becoming resident if acquired under arrangements made before coming to New Zealand (e.g. under an overseas employee share scheme). 

Wider application in limited circumstances

The fact sheet suggests that the revenue account method may be available to all FIF investments (regardless of when acquired and whether listed or unlisted) for persons who are also subject to tax in another country on a citizenship basis after becoming NZ tax resident. In practice, this concession appears to be largely aimed at US citizens.

Anti-avoidance rules?

If the person leaves New Zealand and ceases to be a tax resident, an exit tax may apply to deem the shares to be sold at their market value. This rule is still being developed.

A great start, but some important design questions remain

We are pleased that the Government has committed to introducing the revenue account method, as an alternative to the current FIF options. There are a number of detailed design issues that we hope will be clarified when draft legislation is introduced:

• The length of time a returning New Zealander must be absent before becoming eligible for the revenue account method, if not eligible for transitional residence.
• Timing for revenue account method elections, and whether the election applies to all applicable investments.  
• Whether it would be possible to revoke the revenue account method election and apply the ordinary FIF rules, and how such a transition would work.
• How an “unlisted company” and “unlisted company mainly investing in listed entities” will be defined.
• How the rules would apply to employee share schemes entered into prior to moving to New Zealand where the shares are granted after becoming NZ tax resident.
• Whether there will be “rollover relief” in situations like share-for-share exchanges. For example, if pre-migration shares are exchanged for shares in a foreign acquirer, will those new shares be eligible for the revenue account method? What if new shares are acquired as part of a share split or an amalgamation?
• Whether the proposed rule to prevent double taxation will apply to migrants subject to foreign tax on a citizenship basis only. For example, US green card holders are also subject to double taxation as are those remain tax resident under a foreign country’s local laws where no DTA relief is available. What happens if double taxation ceases, e.g. by giving up US citizenship?
• The detailed design of the proposed exit tax and its application.

Wider FIF reform to come?

We are also encouraged by the Government’s announcement that it will be considering the application of the FIF rules more generally. The challenges of the FIF rules are not limited to new and returning Kiwis and we would welcome the further extension of the revenue account method.