A Taxing Welcome? How New Zealand Plans to Rethink Its FIF Rules to Attract Global Wealth

For years, New Zealand’s foreign investment fund (FIF) regime has been a quiet but potent hurdle for globally mobile taxpayers. Under current rules, individuals are taxed not just on what they earn, but on what their investments are deemed to be worth - even if they haven’t sold a single share. 

The result? A tax bill based on unrealised gains, often leaving investors juggling tax obligations without the cash flow to match. 

A recent proposal by the Government on 12 March 2025 signals a shift. In a bid to roll out the red carpet for high-net-worth migrants and returning Kiwis, the FIF rules are under review, with reforms aimed at reducing their sting and making New Zealand a more attractive financial home.
 

What is the Current FIF Rule and What are its Disadvantages?

Before discussing the new proposal, let’s recap the current FIF rules and their disadvantages. Under the current FIF regime, New Zealand residents who are not transitional residents, with investments in foreign companies, superannuation schemes, or life insurers, may have income attributed to them even if no dividends are paid. The regime primarily targets portfolio shareholdings of less than 10%. Exemptions exist for investments costing NZD 50,000 or less and for shares in companies listed on the Australian Stock Exchange (ASX).

There are several methods to calculate FIF income. For individuals ("taxpayers"), the two common methods are the fair dividend rate method (FDR) and the comparative value method (CV method). Generally, under the FDR method, taxpayers are taxed on 5% of the opening market value of their attributing interest in foreign companies plus quick sales adjustments. Under the CV method, FIF income is calculated using the closing versus opening market value of the shares with adjustments for sales, purchases and dividends. Taxpayers can compare the FDR and CV methods and choose the one that provdies the most favourable outcome. The total result cannot be less than zero, meaning taxpayers cannot claim a FIF loss from these investments.

The FIF rules aim to put offshore investments on a more equal footing with domestic investments, given the absence of a broad-based capital gains tax in New Zealand.

However, the current FIF rules may discourage non-residents with foreign portfolio interests from moving to or staying in New Zealand. Migrants often acquire investments without knowledge of the FIF rules and may struggle to fund tax liabilities arising on deemed income, especially for illiquid pre-migration investments.

The current FIF rules can result in tax liabilities that are difficult to finance, particularly for shares in unlisted companies that do not pay dividends and are harder to sell. This poses a significant challenge for migrants who were unaware of New Zealand's FIF rules when acquiring their foreign investments.

What are the Proposed FIF Changes?

To mitigate perceived barriers to attracting skilled migrants and returning New Zealand residents, the Government proposes introducing an additional calculation method, being the “revenue account method”. Under this method, income each year would be dividends received plus 70% of realised capital gains.

The revenue account method would apply from 1 April 2025, subject to eligibility criteria. It is not mandatory, and taxpayers can choose existing methods if preferred.

In March 2025, Inland Revenue published a fact sheet explaining how the proposed changes will work. While the fact sheet provides additional details absent from the Government’s initial press release, many additional details have yet to be clarified.

Who Will Qualify?

The revenue account method will be available to new migrants who become tax resident subject to tax on worldwide income on or after 1 April 2024, i.e. not transitional resident. 

Returning New Zealanders can also use this method if they have not been tax resident for a minimum number of years. This has not yet been determined, although it is likely it will be a “less than 10 year” test given transitional resident status won’t apply to such taxpayers.

What Investments Qualify?

The revenue account method typically applies only to FIF investments in unlisted entities, excluding those whose primary investment is in listed entities. It is proposed that this method will apply if the investments were acquired before the individual became a New Zealand resident or as part of arrangements made prior to residency.

A significant carveout exists for those taxed on a citizenship basis, allowing those to apply the revenue account method for all FIF investments. This primarily targets US citizens.

How Does the Revenue Account Method Work?

Under this method, only dividends are taxed in New Zealand until shares are sold or the individual ceases to be a tax resident. Gains from the sale of foreign shares attributable to the period of New Zealand tax residence, are taxed when realised or upon leaving New Zealand. Both income types are taxed at the taxpayer's marginal tax rate.

What About Investments Sold for a Loss?

70% of any loss can be offset against income calculated under the revenue account method in the same or a subsequent year, i.e. it is ringfenced against gains derived under the revenue account method.

What If the Person Later Leaves New Zealand?

If a person using the revenue account method ceases to be a New Zealand resident, an exit tax may apply based on the market value of the shares immediately prior to losing their tax resident status. The specifics of the exit tax are still being ironed out.

Our View

The FIF regime was originally introduced due to New Zealand’s lack of a broad-based capital gains tax, and it has helped ensure that foreign investments are taxed in New Zealand. While the proposed changes are seen as a positive step for migrants and returning expats, there are some concerns.

Most notably, the taxation of capital gains at the marginal tax rate (which can go up to 39%) may be seen as too high compared to the capital gains tax rates in many foreign jurisdictions, potentially making the taxation on realised capital gains unattractive.

Additionally, the restrictions on applying the revenue account method to unlisted shares acquired before becoming a New Zealand tax resident may create complexity. Migrants might find themselves navigating a maze of FIF calculation methods for different investments, depending on when and where they were acquired. This could lead to increased administrative burdens and costs for those relocating to New Zealand.

While these changes aim to make New Zealand a more attractive destination for new migrants, they may not resonate as positively with existing migrants, who will still be subject to the current FIF rules, including tax on deemed income. It’s clear that while the Government is laying out a welcome mat, the details will need to be finely tuned to balance both new arrivals and those already here.

Inland Revenue will provide more information once the proposals are included in a Tax Bill, expected in August 2025. The Bill will undergo the usual select committee process, with public submissions, and is expected to pass by March 2026. The Government will continue reviewing the FIF rules' and impact on residents, with more updates expected later in 2025.

Article contributed by: Lydia Liu, Tax Specialist at RSM NZ