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When Foreign Investment Fund Income Arises

A foreign investment fund is an offshore investment with its own income tax rules. Inland Revenue's guide to foreign investment funds, IR461 (April 2026), says a FIF is a foreign company, including a foreign unit trust, a foreign superannuation scheme, or an insurer under a life insurance policy that was not offered or entered into in New Zealand. The rules sit in subparts CQ, DN, and EX of the Income Tax Act 2007. They apply to a New Zealand tax resident who is not a transitional resident and who holds an attributing interest. FIF income can arise before any money is received.

IR461 lists six calculation methods: fair dividend rate, comparative value, the cost method, deemed rate of return, the revenue account method, and the attributable FIF income method. The methods most people compare are the first two. Inland Revenue's own calculator uses fair dividend rate, comparative value, and the cost method. The guide is IR461, and the hub page is foreign investment funds. A bank account, a term deposit, a loan, an overseas rental, a foreign trust interest, and income from foreign employment are not FIFs. An income interest of 10% or more in a controlled foreign company is also outside this label.

If the FIF rules do not apply, dividends can still be taxed, and a sale of shares held on revenue account can still be taxed. Debt is dealt with under the financial arrangements rules. A lump sum from a foreign superannuation scheme is generally taxed when it is withdrawn or transferred, under the foreign superannuation scheme rules, which IR461 points to in Overseas private pensions, IR257. Pension payments are generally taxable here, with a separate guide for some offshore social security pensions, IR258.

The $50,000 Cost Threshold

A natural person, or a trustee of an eligible trust (type A), does not have to apply the FIF rules when the total cost of attributing interests is equal to or less than $50,000 at all times in the year. IR461 question 4 uses that test. The cost is generally the amount paid, not the market value. If the cost exceeds $50,000 on any day, every attributing interest is in the rules. The first $50,000 is not exempt. You can choose to apply the rules while you are still at or under $50,000. Once you opt in, you stay in until a later year when the interests are under $50,000 and each of the four previous years had no attributing interests, or more than $50,000.

Joint owners split the cost. IR461 says that if you and your spouse or partner jointly hold attributing interests which cost $100,000 or less, neither of you exceeds $50,000 on that holding alone. If one of you also holds attributing interests in your own name, that person can cross the threshold while the other does not. Special cost rules cover a share split, a non monetary price, some life insurance premiums, and interests acquired before 1 January 2000 or before 1 January 2005 in the cases the glossary lists.

Fair Dividend Rate

The annual fair dividend rate is the primary method. IR461 says a person is generally taxed on 5% of the opening market value of their attributing interests in foreign companies. The formula in the guide is 0.05 multiplied by opening market value, plus a quick sale adjustment. Dividends and capital gains are not usually taxed separately. A fee rebate is still returned as extra income. If you use this method for one investment, you use it for all your FIF investments that year, unless the legislation stops you.

Opening market value is the total of the market values at the beginning of the income year. Market value is generally the share price on a recognised exchange, or a published unit price or net asset value at which units can be redeemed. An exit value that includes a penalty for early withdrawal is not acceptable. Shares bought during the year have an opening market value of zero, so there is no fair dividend rate income on them unless a quick sale adjustment applies. In the year you sell, income is still based on the opening value even though you do not hold the shares at the end. This estimate does not add a quick sale adjustment.

The method cannot be used for non ordinary shares. IR461 includes fixed rate foreign equities, non participating redeemable shares, shares with an obligation to provide more than the issue price, and investments in foreign entities that have 80% or more of their assets, by value at a time in the year, in fixed rate shares or financial arrangements denominated or hedged in New Zealand dollars. It also cannot be used where the Commissioner has determined that it is not available. Those interests use comparative value, or the deemed rate of return if a closing market value is not practical. The deemed rate is set by a determination for the income year. This estimate does not apply that rate.

Comparative Value

Comparative value, in IR461, is closing market value plus gains, minus opening market value plus costs. Gains are amounts received from holding the interest, which includes dividends, or from disposing of it, and foreign withholding tax or other credits. Costs are expenditure on buying attributing interests, plus foreign income tax you are liable to pay in another country. For a share in a foreign company, this method is limited to a natural person, an eligible trustee (type B), and non ordinary shares. It must be used for a non ordinary share unless the closing market value is not practical to determine.

Enter those three companies as one portfolio: opening $300,000 and closing $292,000. The fair dividend rate is $15,000. Comparative value is a loss of $8,000, and the amount you can return under that method is nil. On company A alone, opening $100,000 and closing $102,000, comparative value is $2,000, which is lower than $5,000. On company B alone, opening $100,000 and closing $110,000, comparative value is $10,000, so the fair dividend rate of $5,000 is lower.

Choosing the Lower Result

An individual, or a trustee of an eligible trust (type B), can use the comparative value total when it is less than the fair dividend rate. IR461 says a loss on the total portfolio is reduced to zero. For every investment where you can choose between the two methods, you use the same method, and the total cannot be less than zero. You cannot claim a FIF loss from those investments. You cannot pick the fair dividend rate for a gain and comparative value for a loss in the same year. An individual or a type B trustee can switch between the methods in different income years, but not within one income year. Another type of person is generally required to keep using the fair dividend rate in later years.

A type B trust is one where the settlor is a natural person or a deceased person, the trust is a complying trust for a distribution, and it is mainly for natural persons for whom the settlor has or had natural affection, or for a charity. The fair dividend rate formula cannot produce a loss. Under comparative value, disposal losses are inside the formula, but a person who can choose between the two methods still cannot claim a loss. A loss can be claimed under comparative value when the interest is a non ordinary share and that method must be used.

Quick Sale Adjustment

The fair dividend rate ignores purchases and sales unless the shareholding in one attributing interest goes up and then down in the same year. IR461 then adds a quick sale adjustment. It is the lesser of the peak holding method amount and the actual gain. The peak holding differential is the lesser of the gap between the greatest holding and the opening holding, and the gap between the greatest holding and the closing holding. Average cost is the total paid for that share and class in the year, divided by the number bought. The peak holding method amount is 5% times that differential times the average cost. Actual gain is worked out on each disposal to the extent it follows a purchase earlier in the year.

The cost method uses 0.05 multiplied by an opening value, plus a quick sale amount that is only the peak holding method amount. It is available for a share in a foreign company only when the fair dividend rate would be allowed but the opening market value cannot be found except by an independent valuation. Opening value can be zero in the year of acquisition, a published net asset value, an independent valuation, or 1.05 times last year's opening value when the holding is unchanged. This estimate does not run the cost method.

Australian Shares and Other Exemptions

A common exemption is a share in a company listed on the official list of ASX Limited, resident in Australia and not treated as resident in another country under a treaty, that maintains a franking account, and that is not stapled stock. IR461 says an individual then has no FIF income from that share. Dividends still go in the return, and a gain can still be taxed if the shares were held on revenue account. Inland Revenue has a tool for this exemption at ird.govt.nz/fif-australia-tool. There is a separate exemption for an income interest of 10% or more in an Australian resident FIF that is taxed in Australia, under section EX 35, if the other conditions are met.

James Stock, in IR461, owns 5% of Japan Co and 8% of Australia Co. Japan Co owns 50% of Australia Co, so his indirect interest is 2.5% and his income interest in Australia Co is 10.5%. If the other conditions in section EX 35 are met, Australia Co is not an attributing interest. Japan Co is, because no exemption applies to the 5% interest. He reports dividends from Australia Co in his IR3, and he still discloses the interest.

From 1 April 2025, some individuals and family trusts may use the revenue account method. IR461 says it taxes dividends and gains on disposal, and gains and losses on disposal are reduced by 30% before tax at the marginal rate. Losses can only offset dividends or gains from interests that use this method, and the excess carries forward. To be eligible, a natural person must become a New Zealand tax resident, and not a transitional resident, on or after 1 April 2024, after at least five years as a non resident. A family trust qualifies if the principal settlor meets that test. If you leave New Zealand while using this method, you are treated as disposing of the interests for market value immediately before you become non resident, unless the interest is not sold within 3 years, or you return within 3 years. The attributable FIF income method is generally for an income interest of 10% or more, using modified controlled foreign company calculations. A taxable distribution from a non complying trust is excluded from that calculation and taxed separately at 45%.

Foreign Tax Credits and the Return

A New Zealand resident may claim a foreign tax credit when the foreign tax is covered by a double tax agreement, and the credit cannot exceed what that agreement allows. Peter, in IR461, receives Swiss dividends with 30% withholding. The agreement limits Swiss tax to 15%, so his New Zealand credit is limited to 15%. Where there is no treaty, a credit might still be allowed if the foreign tax is substantially the same as New Zealand income tax. Australian franking credits, and tax paid on dividends from the United Kingdom, are not foreign tax credits. For the fair dividend rate and comparative value, the credit uses the FIF income, not the dividend the foreign tax was taken from. No credit is available if that segment is a loss. Unused credits are not refunded and are not carried forward. Interpretation statement IS 21/09 covers the calculation.

Some Australian companies can attach a New Zealand imputation credit and resident withholding tax. Those are not foreign tax credits. If the dividend is larger than the FIF income from that interest, the imputation credit you can claim is worked out on the FIF income. If the FIF income is larger than the dividend, the whole imputation credit can be claimed. Excess imputation credit is not carried forward and is not turned into a loss. Resident withholding tax offsets tax payable, and any excess is refundable. IR461 says you can enter the full amount even when FIF income is nil or there is a FIF loss, and you should note that in the return.

From the 2023 tax year, an individual files an overseas income summary, IR1261, even when an International Tax Disclosure Exemption may apply. The exemption does not remove the need to declare FIF income. Disclosures are part of the return in myIR. A person with less than a 10% income interest, using the fair dividend rate or comparative value, in a company incorporated or tax resident in a double tax agreement country, is often inside the usual disclosure exemption, unless they are a portfolio investment entity, a widely held company, a widely held superannuation fund, or a widely held group investment fund. The $50,000 exemption is also a usual disclosure exemption. The notice is usually in the April Tax Information Bulletin. An IR3 filing checklist is where many sole traders meet that overseas income summary. A transitional resident's exemption ends if they apply for Working for Families tax credits. FIF income is part of worldwide income. It can create a tax bill with no cash receipt, which is why the figure belongs in the return rather than being treated as a separate flat tax.