Fine Print: Overseas mutual funds and the tax you pay even when you earn nothing
It’s not always obvious how the system works. (Awaaz artwork)
If you are a New Zealand tax resident, you are required to pay tax on your worldwide income.
(Fine Print is an ongoing series that looks at how things actually work in New Zealand. Beyond what most migrants are told.)
Many New Zealand residents invest in mutual funds overseas –especially in countries like India, the US, or the UK. While this helps diversify investments, it also brings tax rules that are often not well understood.
If you are a New Zealand tax resident, you are required to pay tax on your worldwide income. This includes income from overseas mutual funds.
In most cases, these investments fall under the Foreign Investment Fund (FIF) rules. If the total cost of such investments exceeds NZD 50,000, FIF taxation generally applies, and you may need to use one of the approved calculation methods.
The most common method is the Fair Dividend Rate (FDR). Under this method, you are taxed on 5% of the value of your investment each year, even if you have not received any income or sold the investment. This can come as a surprise to many investors.
Another method is the Comparative Value (CV) method, which is based on actual movement in value. Under this approach, tax is calculated on the change in market value during the year, including gains, losses, and any withdrawals or contributions. If the investment value falls, there may be no taxable income.
To understand how this works, consider an investor who bought overseas shares and mutual funds for $51,000 in March 2024. By March 2025, the value of the investment had increased to $60,000.
Under the FDR method, the investor would be taxed on five per cent of $51,000, which is $2,550. Under the CV method, the gain would be $9,000, but in most cases the lower FDR amount is used.
In the following year, by March 2026, the value of the same investment falls to $46,000. Under the FDR method, the investor would still be taxed on five per cent of $60,000, which is $3,000.
But under the CV method the investment has made a loss, so there would be no taxable income. In such a case, the CV method can be used to avoid paying tax for that year.
If your total overseas investment is below $50,000, the rules are simpler. You are taxed only on actual income received, such as dividends, and capital gains are generally not taxed.
For example, an investor who bought overseas mutual funds for $10,000 and saw the value rise to $60,000 by March 2025, and then to $70,000 by March 2026, would not fall under the FIF rules because the original cost was below $50,000.
In both years, the investor would be taxed only on dividends received, if any, and not on the increase in value of the investment.
For many investors, particularly those holding Indian mutual funds and shares this can result in paying tax without receiving any cash returns. It is therefore important to review your investments regularly and seek professional advice where needed.
In summary, while overseas mutual funds offer good diversification, understanding New Zealand tax rules—and the available calculation methods—is essential to avoid unexpected tax liabilities.“
(Raj Kapoor is a chartered accountant by training and a Senior Partner at Mohindra & Associates in New Zealand and India. He has spent decades across finance, governance and audits. A former board member of the State Bank of India and long-time ICAI office-bearer, he now chairs the New Zealand Chapter of ICAI.)
