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Investing in platforms like Sharesies has opened opportunities for everyday Kiwis to grow wealth through New Zealand, Australian, and international shares, ETFs, and managed funds. While this accessibility is exciting, it has also introduced new complexities, especially around tax compliance. Many investors are unaware of how mistakes or assumptions can lead to tax reporting errors.
This guide explores potential tax pitfalls when using Sharesies and offers actionable steps to ensure you stay in IRD’s good books.
Sharesies Tax Tips: 5 Mistakes to Avoid
1. Incorrect prescribed investor rate (PIR):
Investment income from a portfolio investment entity (PIE) fund is taxed using your prescribed investor rate (PIR), which is capped at 28%. If your PIR in Sharesies is wrong for your income level, you could either overpay or underpay tax. The IRD will reconcile this at the end of the financial year, and you might face a tax bill if your PIR is too low.
2. Ignoring foreign investment tax rules:
Sharesies enables you to invest in US and Australian shares. If the value of your overseas investments exceeds NZ$50,000, they become subject to FIF (Foreign Investment Fund) rules. This adds complexity, requiring a tax calculation using methods like the Fair Dividend Rate (FDR) or Comparative Value (CV). Choosing the right method to use when reporting to IRD can impact the tax to pay.
3. Misunderstanding dividend taxation:
Dividends received through Sharesies are taxable income. While the platform deducts Resident Withholding Tax (RWT), it’s important to confirm that the correct tax rate has been applied. If you provide the wrong rate or do not provide a tax rate, you could end up with a surprise tax bill.
4. Not realising you are a ‘trader’:
The attractive selling point of Sharesies is that they withhold, pay and report tax on behalf of most New Zealand investors. However, this is only done for dividend income. Most investors don’t need to pay tax on any profits when they sell their shares, but if IRD determines that you are a trader, that changes. If you buy shares to sell/’flip’ for immediate profit (not with the intention to hold for a long term), IRD may consider you a trader, so profit gained on sale would be taxable at your marginal tax rate. Sharesies does not take care of your reporting obligations for this type of trading activity.
5. Not understanding tax implications for different investment types:
Different types of investments have distinct tax treatments, so understanding them can help you make better investment decisions.
- New Zealand Shares:
Gains from the sale of New Zealand shares are typically not taxed, but any dividends received are taxable income. These dividends may include a combination of Resident Withholding Tax (RWT) and imputation credits, which reduce your tax bill by accounting for tax already paid by the company. Most platforms like Sharesies handle this automatically, but it’s essential to verify. - ETFs (Exchange-Traded Funds):
In New Zealand, ETFs are classified as listed PIE (Portfolio Investment Entity) funds. Distributions (dividends) from these funds are taxed automatically at the highest Prescribed Investor Rate (PIR) of 28%. For investors with a lower PIR, this can result in overpayment of tax, which which will be refunded upon filing a tax return with the IRD. On the other hand, investments in overseas ETFs are taxed at the investor’s individual income tax rate, which is 33% or 39% for many taxpayers. - International Shares:
Investments in foreign shares are more complex. Dividends are taxable, and foreign investments over NZ$50,000 are subject to FIF (Foreign Investment Fund) rules. These investments often incur higher tax obligations compared to domestic ones and don’t benefit from imputation credits.
How to Mitigate Tax Risk
1. Set the Correct PIR:
Ensure you provide Sharesies with your correct PIR (in your profile settings), which is based on your total income over the past two tax years. You can use the IRD’s PIR guide to help you determine what your rate should be.
2. Confirm Resident Withholding Tax (RWT):
For dividends and interest earned through Sharesies, confirm that the correct RWT rate has been applied. This rate is based on your total annual income and ensures that you don’t underpay or overpay tax during the year. You can supply and update your RWT rate with Sharesies in the settings of your profile. Remember to update your RWT details in Sharesies if your income changes.
3. Understand FIF Rules for Overseas Shares:
If your overseas investments approach the NZ$50,000 threshold, consider consulting a tax professional to ensure compliance with FIF regulations. Platforms like Sharesight integrates with Sharesies and can also help you track and report foreign investment income and calculate your FIF income.
Please note that Kiwitax does not offer FIF calculation services, so you may need to seek specialist advice if this applies to you.
4. Seek Professional Advice:
If your investment portfolio includes multiple funds, foreign shares, or you are actively buying and selling as a ‘trader’, it’s worth getting support/advice from a professional who specialises in this area of tax accounting. Their expertise can save you time, stress, and money.
When to Call in the Experts
The more complex your portfolio, the higher the likelihood of tax complications. For instance:
- Holding multiple foreign ETFs or shares.
- Balancing investments with rental property income or self-employment.
- Navigating the FIF rules for foreign investments above NZ$50,000.
In these cases, professional guidance isn’t just an added expense, it’s an investment in peace of mind.
Final Thoughts
Investing through Sharesies can be a great way to grow your wealth, but it’s important to approach your tax obligations with care. By understanding the rules, keeping organised records, and seeking help when needed, you can make it through tax time with ease.
Need an accountant who will give you tax advice and keep you compliant with IRD? Let’s chat!
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Disclosure:
This article is intended for informational purposes only and does not constitute tax, financial, or investment advice. The information provided is based on current tax laws, as of the date this article was published, in New Zealand and general guidance for investors using platforms like Sharesies. Tax obligations vary based on individual circumstances, and readers are encouraged to consult a qualified accountant or tax advisor for advice tailored to their situation. Kiwitax does not assume liability for any actions taken based on the information in this article.
