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W & K

Tax Time Draws Near

As we are now very close to the end of the tax year, for many investors, it is very timely that they get their financial records up to date. Investment Portfolio Tax can either be a very interesting topic, boring, simple, or a plain chore.

It has been a number of years since the investment taxation laws were changed to any extent. That change was needed to accommodate KiwiSaver and the introduction of PIE Funds. The change also flowed through to foreign investment funds.

Foreign investment funds (FIF Funds) for New Zealand investors are typically overseas unit trusts and UK investment trusts. The majority of overseas shares with the exception of Australian domiciled shares with franking credits, are deemed to be foreign investment funds.

Investors need to be able to prove peak portfolio values of their FIF funds. If the investor is over the de minimis threshold, then they need to account for their investments using either the FDR (fair deemed rate of return method) or the CV (comparative value method). Using the FDR method, taxable income is deemed to be 5% of the value. In a poor investment year, the CV method is generally used, as in those years it will invariably reduce the portfolio taxable income.

This can all be pretty heady stuff. Fortunately investors using portfolio administration services generally have the tax calculations stated on their portfolio tax summaries.

Recently, the proverbial has hit the fan. A number of investors who invested via David Ross used figures provided by him as the basis for their taxation calculations. The Ross returns were purely fictitious, meaning that the investors paid tax on investments that were simply a figment of Ross’ mind. This was great for IRD. Now the battle for investors is to try and ascertain what the correct figures were, calculate tax and resubmit taxation returns based on the revised figures.

The onus is on the investor to demonstrate that tax was paid on fictitious returns from investments. Refunds would be able to be backdated to 2009. They may also be available for the 2005 to 2008 income years applying an eight-year rule providing that the taxpayer can demonstrate that the overpaid tax results from a ‘clear mistake or simple oversight’. The real issue will be how the IRD defines a clear mistake. Will the conviction of Ross (assuming he is convicted) be considered to be a clear mistake? Victims of Ross will not be the only ones in this predicament. Investors with convicted fraudster Jacqui Bradley spring to mind.

Investors, who are in this situation, would not have been, if they had invested via reputable investment advisers using either a wrap account such as Aegis, or some other management systems provided by fund managers or share broker houses. Because of the Ross and Bradley fraud cases the FMA are currently taking a closer look at discretionary investment management providers to ensure that they have measures in place to protect investors from fraud.

Disclaimer

Steven Barton (FSP 32663) and Susan Pascoe Barton (FSP 32382) are Certified Financial Planners and Authorised Financial Advisers.  Their initial disclosure statements are available free of charge by contacting them on (07) 3060080 or they can be downloaded from www.pascoebarton.co.nz. This column is general in nature and should not be regarded as personalised investment advice.