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Until March 2013, Mary's Qantas Award-winning syndicated column appeared fortnightly in the Christchurch Press, Dominion Post, Gisborne Herald and Waikato Times. Below is her final column after 16 years.
Syndicated column April 3 2007: New tax rules not so bad
As the new tax regime on shares in countries beyond Australasia takes effect, many taxpayers seem to think it's tougher than it really is.
For a start, if you hold your international shares directly - as opposed to in a managed fund - and they cost less than $50,000 when purchased, you are exempt.
If it's hard to establish the cost of shares bought before January 1, 2000, you can use half their market value on April 1, 2007.
Those who don't fall within that exemption will generally pay tax on 5 per cent of their portfolio.
Note that doesn't mean a 5 per cent tax - a common misconception. The 5 per cent is added to your other taxable income, which is then taxed at your marginal rate.
Even in the top tax bracket, the most you pay is 39 per cent of 5 per cent, which comes to 1.95 per cent. In the 33 per cent bracket, it's 1.65 per cent, and in the 19.5 per cent bracket, it's just 0.975 per cent.
Also, for direct investors, in some years the tax will be lower. How does that work?
Firstly, note the value of your shares on April 1. Through the following year, keep track of dividends received. And, on April 1 2008, calculate your total share value again.
Add the dividends and the year-to-year change in share values to determine your taxable income.
Here are some scenarios:
· Dividends 2 per cent, shares rise 10 per cent, total change 12 per cent. That's higher than the 5 per cent maximum, so add 5 per cent of your April 1, 2007 share value to your other taxable income.
· Dividends 2 per cent, shares rise 2 per cent, total change 4 per cent. That's lower than 5 per cent, so add 4 per cent of your share value to other taxable income.
· Dividends 2 per cent, shares drop 3 per cent, total change minus 1 per cent. You've suffered a loss, so you pay no tax - although you can't deduct that loss against other income, nor carry it forward to use in future years.
In this last scenario, you're better off than under the old system, when share values could plunge but you were still taxed on dividends.
Other pluses of the new system:
· If you receive dividends of more than 5 per cent - which could well happen, for instance, in some Australian unit trusts - you pay tax on 5 per cent only, and sometimes less if share prices fall.
· If you buy a share after April 1 and still hold it the following April 1, you pay no tax on that share that year - although it will be part of your portfolio the following year.
Note that there are other rules for shares bought and sold within a tax year.
Before I'm accused of doing public relations for the government, I'm hardly thrilled with the way the changes affect international share funds.
These funds don't get a break if their returns are low. They pay tax on 5 per cent regardless.
In the majority of international share funds, which are actively traded, this is generally more than offset by the fact that they will no longer pay tax on capital gains.
However, international index funds - which I prefer - never paid tax on those gains. They have always been taxed only on dividends, which usually total considerably less than 5 per cent.
Still, the total impact won't be all that high. I, for one, am keeping my international index fund investments.
By the way, investors in all share funds don't need to keep track of anything. The funds will handle it all for them.
* Mary Holm is a seminar presenter, author of "Get Rich Slow" and publisher of quarterly newsletter "Holm Truths" (see www.maryholm.com). Her advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following the advice. She can be reached at email@example.com, or by mail care of this newspaper. Sorry, but she cannot respond directly to readers.
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