In our recent discussion with Matt Harris, we unpacked the tax on shares that’s costing Kiwi investors thousands and why it remains one of the most misunderstood parts of investing.
Why This Is So Misunderstood
When it comes to investing, most people understand how tax works on their income. Some even have a rough idea when it comes to property. But shares? That’s where things get confusing.
A key point raised in the discussion is that New Zealand does not have a general capital gains tax – and that applies not just to property, but also to businesses, stocks, and other assets.
For Kiwi investors buying New Zealand shares with the intention of holding long-term:
- You are taxed on dividends and interest received
- You are not taxed on capital gains
Dividends may also come with imputation credits, which recognise tax already paid by the company (at 28%), helping avoid double taxation.
However, your personal tax rate still matters. For example:
- Tax on dividends depends on your income
- Additional withholding tax may apply on top of imputation credits
How Tax Changes on Global Shares
Things become more complex when investing internationally – which many Kiwi investors are doing more of through platforms like Sharesies and Hatch.
If you invest less than $50,000 NZD in foreign shares:
- You remain under standard tax rules
- You’re taxed on dividends and interest only
But once you cross the $50,000 threshold, the Foreign Investment Fund (FIF) rules apply.
This is where the tax on shares can start costing investors significantly.
Under FIF:
- You may be taxed on a notional return (typically 5% of your portfolio value each year)
- This applies even if you haven’t sold anything and received no income
This creates a key issue:
- You can receive a tax bill without actual cashflow
As discussed:
- Tech stocks often don’t pay dividends
- Yet investors can still face annual tax obligations based on assumed growth
There are alternative calculation methods (like comparative value), and typically the lower result is used each year.
Another key limitation:
- Losses generally cannot be claimed
- Tax may still apply as values recover over time
PIE Funds and Why They Can Reduce the Tax Drag
Portfolio Investment Entities (PIEs), which include most KiwiSaver and managed funds, were highlighted as a more tax-efficient structure for many investors.
Key benefits:
- Maximum tax rate capped at 28%
- Can create a tax advantage of up to 11% for higher earners (vs 39%)
- Designed to be passive and efficient for long-term investing
For many everyday investors:
- PIEs simplify tax
- Reduce administrative complexity
- Potentially improve after-tax returns
Not all funds are equal – differences in structure can lead to tax leakage, which can materially impact outcomes over time.
Employee Share Schemes: Where Tax Gets Tricky
Employee share schemes are another area where investors can be caught off guard.
Key points:
- You are taxed when shares vest, based on the difference between market value and what you paid
- This can create large upfront tax bills, even before you sell
- If shares exceed $50,000 (especially US-based), FIF rules may also apply
A major risk highlighted:
- Tax is often due before liquidity is available
- Share prices can fall after tax is paid, leaving investors in a worse position
- Some investors ended up with tax liabilities that exceeded the value of their shares at one point in time.
Key Takeaways
- Shares are one of the most misunderstood areas of tax in New Zealand
- Local shares are generally taxed on dividends – not capital gains
- Crossing $50,000 in foreign investments triggers FIF rules
- FIF can create tax bills without income or realised gains
- Losses on shares are typically not claimable
- PIE funds can offer meaningful tax advantages and simplicity
- Employee share schemes can create unexpected tax liabilities
- Tax should inform decisions – but not drive them entirely
Next Steps
If you want to understand how the tax on shares is impacting your portfolio and structure your investments more efficiently, get in touch with Lighthouse Financial.
If you’d like to watch more, check out this other episode below.
For a no obligation discussion to see how we can help you on the path to wealth, please contact us.
Disclaimer:
The information in this article is general information only, is provided free of charge and does not constitute professional advice. We try to keep the information up to date. However, to the fullest extent permitted by law, we disclaim all warranties, express or implied, in relation to this article – including (without limitation) warranties as to accuracy, completeness and fitness for any particular purpose. Please seek independent advice before acting on any information in this article.
