A step in the right direction? The revenue account FIF method is coming—what we know so far

By Joe Sothcott & Sam Mathews

In the first big tax policy announcement of the year, the Minister of Revenue Hon Simon Watts has announced the proposed introduction of a new calculation method to the Foreign Investment Fund (FIF) regime - the revenue account method – proposed to apply from 1 April 2025.

This proposed change is the result of policy consultation undertaken over the new year looking at how the FIF regime could be discouraging migrants coming to (and staying in) New Zealand. We discussed this consultation in our February 2025 edition of Tax Alert.

Whilst nothing is confirmed yet, a couple of days after the Minister’s announcement Inland Revenue published the first details of the proposed new method in a brief fact sheet.

Background – what’s all the fuss about?

To understand why these changes are being made, it’s worth tracing back to the root of the issue. So what are the FIF rules?

New Zealand tax residents can be subject to the FIF rules if they have an interest (e.g. shares) in a foreign company, the interest is not enough to ‘control’ the company (in which case the Controlled Foreign Company rules apply) and no exemptions apply. The two most common exemptions being where the total cost of the shares is NZD50,000 or less, or where the foreign company is listed on the ASX (Australian Stock Exchange).

The FIF rules aim to ensure there is no tax advantage when investing offshore compared to investing in New Zealand. The rules make sense in the context of the New Zealand tax system as generally, capital gains are not taxed. However, taxpayers subject to the FIF regime—when using existing methods like the fair dividend rate (FDR) or cost methods—calculate tax on deemed income. This means there can be tax to pay even if no actual income (i.e. dividends received or shares sold) has been received. The FIF rules are internationally unusual in (largely) taxing deemed income, rather than taxing on a realisation basis.  

Deemed taxable income under the FDR and cost methods is calculated as 5% of either the market value at the beginning of the year (FDR) or the cost of acquiring the shares (cost, with the cost base uplifted by 5% every year). Three problems had been identified with this approach:

1. For illiquid shares (such as unlisted shares), it is difficult to sell the shares to pay tax on the deemed income so there is often a cashflow issue.
2. Because tax is imposed on deemed income, the tax paid on FIF income in New Zealand may not be able to be used as a foreign tax credit to offset foreign taxes due on the actual sale of the investment (typically capital gain taxes) in the overseas jurisdiction, resulting in double taxation.
3. Where a FIF method requires valuation (e.g. on entry into the FIF rules), this can be difficult (even impossible sometimes) and expensive, especially for unlisted shares.

Given migrants are more likely to have shares in foreign companies, they are likely to feel the full impact of these issues.

The revenue account method

The revenue account method won’t be made available to all taxpayers. Inland Revenue have stated that only those who became a full (not transitional) New Zealand tax resident on or after 1 April 2024 will be able to use this new method (subject to other eligibility requirements). In other words, anyone whose transitional residency period ended on or after 1 April 2024 are eligible (i.e. anyone who became a transitional resident on or after 1 April 2020).

Why 1 April 2024?

This date has not been plucked out of thin air. The revenue account method is being implemented as a result of influx of migrants who moved to New Zealand during the COVID-19 pandemic and who have had or will have their transitional residency expire soon.

This is also the case for many returning expats. Inland Revenue has indicated that returning expats will be also able to use to revenue account method, but only if they have not been a New Zealand tax resident for a minimum number of years. Whilst the Government has not yet advised the exact minimum number of years, the Inland Revenue has suggested it is likely to be less than the current 10 year transitional residency requirement.

The use of the revenue account method for migrants will not be mandatory, so existing methods of calculating FIF income will still be able to be used, if preferred. It will also be available to the trustees of a trust if the principal settlor of the trust would be able to use the method (in relation to the particular FIF interest).

What type of investments can the revenue account method be used for?

In most cases the revenue account method will only be able to be used for unlisted entities. Unlisted entities whose main investments are listed entities are also excluded. The investments in unlisted entities must have been acquired before the investor became a New Zealand tax resident or “pursuant to arrangements made before the investor became a New Zealand tax resident”.

There is a significant carveout to this for anyone who is subject to tax on a citizenship basis after they become New Zealand tax resident. The revenue account method will be able to be applied to all their FIF investments. This is primarily targeted at US citizens due to the US approach of taxing based on citizenship rather than tax residence.

How does the revenue account method work?

The revenue account method itself is quite simple, when compared to other FIF methods. If opted for, tax is paid on two types of income:

• Any dividends received — tax will be paid on 100% of the dividend amount.
• Any realised capital gains — tax will be paid on 70% of the gain (the sale proceeds less the cost of the shares). Detail on how the cost of the shares is calculated is not yet confirmed (noting the valuation issue mentioned above).

Both income types will be taxed at the taxpayers marginal tax rate.

Where the investment is sold for a loss, 70% of the loss can be deducted against other income calculated under the revenue account method—either in the same or future tax year.

Departing from New Zealand may trigger an exit tax

Where a person is using the revenue account method but then ceases to be a New Zealand tax resident, an “exit tax” may apply. The exit tax would treat the former New Zealand tax resident as if they had sold all their shares for their market value immediately before they lost their New Zealand tax residence. Further details about the exit tax will be published by the Inland Revenue when they have been determined.

A step in the right direction?

Yes, but with a big “but”. Migrants and returning expats will welcome the addition of the revenue account method as an option as it will address some of the issues outlined above. What will be less welcome is the 70% inclusion rate for gains and the restricted application of the method, which could create additional complexity and compliance costs for some.

If a taxpayer is on the top marginal tax rate of 39%, taxing 70% of the gain results in an effective tax rate of 27.3%, which is higher than the rate that would likely apply in a number of comparable countries. For example, Australia generally taxes 50% of the gain, resulting in an effective rate of 22.5% (45% top marginal rate x 50%). The effective tax rates on these gains in the US and UK is also lower than 27.3%. The key objective of the proposals is to encourage migrants and expats to come to New Zealand and stay here, and we question whether setting an effective tax rate higher than other countries these people could choose to live in is consistent with that objective.

Restricting the revenue account method (in most cases) to unlisted shares acquired before the person becomes New Zealand tax resident will often require taxpayers to apply different FIF calculation methods to different FIF investments, which may be impractical and/or costly. Migrants and expats would need to effectively split their share portfolios between listed and unlisted shares, and shares acquired pre and post becoming New Zealand tax resident. This may be very difficult for some and again reduce the attractiveness of the rules to the target group.

So what next?

There are still plenty of issues to iron out, which will all contribute to how effective the proposal is in achieving the government’s policy objective. Inland Revenue have stated that further details will be published upon the arrival of the next Tax Omnibus Bill, due for introduction to Parliament in August 2025.

Positively, the Minister has indicated that the government is looking at further changes to the FIF regime and related international tax settings to encourage migration to New Zealand, and for New Zealand residents to stay and invest here. This could include adjusting the current NZD50,000 de minimis threshold (which has not been increased since 2000) and expanding access to the attributable FIF income method (a FIF method that applies an active income exemption to certain FIF interests).

As we explained in our February article, Deloitte believes there are other tax areas which could be improved for migrants and expats. These include:

• Financial arrangement rules (generally tax certain investments on an accrued unrealised NZD basis).
• The CFC rules.
• Mismatches in the way New Zealand treats an investment with foreign countries (e.g. entities that are flow-through for tax purposes in the US, such as limited liability companies and S Corporations, but are not flow-through for New Zealand tax purposes).

We eagerly await the publication of the next Tax Omnibus Bill and any announcements of further proposed tweaks to the FIF and international tax rules.

If you have any questions or would like to discuss how the international tax rules may apply to your overseas investments, please contact your usual Deloitte advisor.