For investments in Kernel’s global and specialty index funds, you are taxed according to the average balance of your investments throughout the year. For investments in Kernel's NZ funds it is a different method, which you can learn more about here.
Since 2007, there has been a complex set of criteria as to how tax applies to international investments made by New Zealanders. Known as the Foreign Investment Funds (FIF) regime, you can find out the full details in this IRD guide or read our blog.
The essence is that through a NZ fund manager investing overseas, like Kernel, you are taxed each year in April, on the average balance of the previous 12 months (prorated if you invested during the year).
You will pay the tax earlier if you sell the majority of your holdings in a fund. Known as the Fair Dividend Rate, your PIR (prescribed investor rate) is multiplied by 5% of the average balance, to work out the tax. Foreign Tax Credits we have collected from withholding tax already paid overseas are then allocated to you to reduce the amount you have to pay.
This tax is not directly related to the distributions paid by the fund and unlike NZ investments not related to the dividends/income received by the fund. You are likely to owe tax even if the fund loses value.
An example below for global investments:
| Average balance | Deemed 5% Dividend | Total Tax | Foreign tax credits applied | April Tax |
International Fund A | $10,000 | $500 | $140 | $100 | $40 |
International Fund B | $5,000 | $250 | $70 | $20 | $50 |
International Fund C | $5,000 | $250 | $70 | $0 | $70 |
Totals | $20,000 | $1,000 | $280 | $120 | $160 |
In the above example, the required tax is $280 for the year, but $120 has already been paid to foreign governments, so under double tax treaty rules, only $160 is owed to Inland Revenue, combined with any tax or tax refund from your NZ investments.
At Kernel, we take care of all calculations, reporting and payment, combining the tax from all your Kernel funds and paying or getting you the refund from Inland Revenue on your behalf.
You will be able to view your tax statement each year in the Kernel platform by the end of April. This contains a further breakdown of the tax payment and the tax credits applied, should you need it for a tax return. If your PIR is correct, the correct tax should have been paid.
Please note: Owning overseas shares individually (up to $50,000 invested) may work out to be more tax-efficient in isolation. However, other transaction costs for holding and claiming tax credits may work out to be larger than the difference.
When you have more than $50,000 invested overseas, then a New Zealand-based fund pays less tax over 70% of past years. For the advanced details, see IRD's guide to foreign investment funds here.