When James, a tech entrepreneur from the UK, moved to New Zealand in 2021, he was excited about the new opportunities ahead. Having built a startup overseas he retained a stake in its future success. But as his four-year transitional residence period neared its end, he faced an unexpected challenge—he owed tax on his foreign shares, even though he hadn’t sold them. The problem? The tax bill was based on theoretical gains, not actual cash in hand.

James’ story is not unique. Many skilled migrants who arrived during COVID-19 now face the same issue under New Zealand’s Foreign Investment Fund (FIF) rules. The Government, recognising the potential unfairness of the system, has proposed changes in a Discussion Document released in December.

The FIF rules: a quick overview

New Zealand’s FIF rules apply to New Zealand tax residents who directly own shares in foreign companies. There are a couple of exceptions:

• Australian listed shares are exempt.
• The rules do not apply if total FIF investments are $50,000 or less.
• Most new migrants receive a four-year transitional residence exemption from the FIF rules.

The FIF regime aims to ensure that share investments in overseas companies are not tax-preferred over investments in New Zealand companies.

However, under the two most common methods of calculating FIF income - Fair Dividend Rate (FDR) and Comparative Value (CV) - investors must pay tax on unrealised gains.

The issue: a mismatch between tax and reality

The Discussion Document considers that the current FIF rules may be unfair to new migrants, particularly those who own illiquid shares. This includes those who have been involved in startups and may have taken a shareholding, or who have been involved in owning and growing a business.

The current rules could be unfair because taxpayers are required to return income and pay tax on a notional amount of income, rather than on realisation. A migrant may not have the cash to pay the tax until the shares are sold, making it difficult to raise the money to return the tax. Some of those affected may have arrived in New Zealand in 2020 or 2021, at the height of the Covid-19 pandemic. As they near the end of their four-year transitional residence grace period, a timely law change could provide much needed assistance for these “COVID migrants”.

It is hoped that a change to the FIF rules could stimulate overseas migration of high-net-worth individuals and may encourage others to stay.

The proposals

The Government is considering three possible solutions:

1. Revenue account method 
Unlisted overseas shares would essentially be treated as being on revenue account. Dividends would be taxed upon receipt and any gain on the shares themselves would be taxed on disposal.

2. Deferral method 
This method would be a variation on the current FDR method. Unlisted overseas shares would be taxed on disposal. However, the gain would be calculated based on a deemed 5% annual return during the time the taxpayer is New Zealand resident. Additionally, this method would include a use of money interest component.

3.Changing the attributable FIF income method 
This would allow the “attributable FIF income method” to be used by taxpayers who have a less than 10% interest in the FIF. Currently the method cannot be used unless the taxpayer has an interest of 10% or more.

The Discussion Document proposes that all new methods would be optional and would apply only to unlisted international shares.

Notably, debt investments and crypto assets are excluded from these proposals, despite many skilled migrants holding illiquid assets in these categories.

Looking ahead: Will the changes be enough?

While these proposals underscore challenges within the current FIF rules, a broader review is necessary to assess whether the rules remain appropriate in 2025. In the meantime, the Government could decide to implement one or more of the suggested changes. Ideally, any adjustments resulting from this Discussion Document will help attract foreign investment and retain highly skilled migrants.

CA ANZ's submission favoured the revenue account method over the deferred method for its efficiency and simplicity. It also recommended further work on the attributed FIF income method and advocated for a broader FIF review including to eventually extend the revenue account method to all investors.