Overseas residents considering investing in NZ based unit trusts, superannuation and insurance bonds

When making this kind of investment decision, much depends on the personal tax situation of the investor and the taxation laws of the country of residence. As it is impossible for us to cover every circumstance, this information is of a general nature only. (Please read our disclaimer!)

From a tax perspective, how should an overseas taxpayer invest?

Unit Trusts

YES

1. Unit trusts which are invested predominantly in the New Zealand share market and which are not active trading funds ie. Do not provide for and pay tax on capital gains.

From a tax perspective, if one is expecting most of the return to derive from capital growth rather than dividend distributions, then these are suitable for overseas investors wanting exposure to these sectors. Imputation credits issued as a result of distributions are of no value but investing directly in NZ companies rather than through a fund will give much the same tax result.

NO

2. Unit trusts which are invested predominantly in income producing assets or have a significant proportion in such assets. eg. bonds, mortgages, property.

Generally we would not suggest overseas investors use this type of fund. Most or all of the return derives from income. The funds pay tax (@33%) on this and issue imputation credits which generally cannot be used by the non-resident. Furthermore, as it is likely the investor would be taxed again by their resident tax authority the result is double taxation.
           

Group Investment Funds

YES

Group Investment Funds (GIF's) which do not pay tax. (These are sometimes called Category B Group Investment Funds). These funds deduct tax at source and issue withholding tax credits or have Approved Issuer Levy status (AIL).

Generally these are income oriented funds which are suitable for non resident investors. (Some are property funds). Residents of those countries that have a double taxation agreement with New Zealand may be able to use any withholding tax credits issued.

Those funds which have Approved Issuer Levy Status can deduct the levy at 2% in lieu of withholding tax. This makes these funds very tax effective for residents in low or zero tax jurisdictions.

Group Investment Funds which pay tax and issue imputation credits can be considered in the same category as unit trusts and the same comments above apply.    

Superannuation Trusts and Insurance Bonds

NO
As these funds pay tax on both income and capital gains and do not issue any form of tax credit, we suggest that overseas residents avoid them altogether from a tax perspective.