Agony Aunt: Investing in Oz

Dear Janine,

I recently opened an account with a share broker in Australia (Morgan Stanley Smith Barney). There are no account fees and excellent online investment information. I simply pay brokerage on each trade. The account comes with a bank account with Citibank. Once again, there are no account fees (or minimum deposits or balance). As a non- resident of Australia, I don't have to file an Australian income tax return and the non-resident withholding tax I pay on dividends can be listed in my tax return here in New Zealand as foreign tax paid.

Having taken this step, I've now got access to a stock exchange and a bond market with considerably more depth than the New Zealand ones. I accept that I've taken on an exchange rate risk, but that could go either way. In addition, now when I visit Australia, I have a local bank card to use for Eftpos transactions there (and in Australian ATM machines). With these benefits, what's the downside? Why don't more New Zealand investors open investment accounts in Australia?

ANSWER:

A short hop across the Tasman, and indeed, there is more than just sunshine and Movie World. With good long-term gains in the Australian market, it's easy to see the golden glow of the lucky country. But like any investment, you need to go in with your eyes wide open. When the global financial crisis hit, Aussie shares plunged more than 50 per cent from peak to trough. Many people can't stomach that volatility, despite the potential rewards. In the same way, Movie World's 4.5 G-force Batwing ride causes a range of emotions from excitement to tears.

By the sounds of it, you are a classic DIY investor - smart, proactive, have an appetite for risk and control. Many people would feel out of their depth on this and prefer to leave it to a professional fund manager and invest via PIEs or Australian Unit Trusts.

Many investors can't see beyond the property market and that addiction perplexes me. Property is time intensive and is not risk-free. I delight in the fact that stockbrokers don't demand that you come and fix the loo in their office. While many investors are prepared to borrow vast sums in the property market, few realise that when borrowing to invest in the sharemarket, there is interest deductibility for tax purposes. Dividends give income and the yields on some Aussie shares wouldn't be vastly different to rental yields. Now that property can't be depreciated, some investors might weigh up their options a little more. A sensible approach is to never believe that one asset class is nirvana - property, bonds, cash, New Zealand, Australian and global shares, are needed in balance.

What's the downside? Here are a few tips (this is just food for thought, so make sure you seek advice):

1. Lack of diversification: A balanced portfolio is not 100 per cent Australian.

2. Exchange rate risk: Beware the double whammy ie. shares fall in value and the Aussie dollar depreciates. This gives a double loss. Currency risk adds volatility.

3. Being deemed a "trader": The IRD then taxes all gains as income.

4. Franking credits are useless to Kiwis: If you bought a New Zealand share, the imputation credits could be used.

5. Holding cash in an Australian dollar bank account: Handy for travel, but make sure you know the tax implications. If the Australian dollar appreciates, you'll make a gain on your bank account, but you might be taxed on it in New Zealand (losses would be deductible). If you have over $1 million, tax may apply when the losses are not even realised. Get your accountant to check the financial arrangement rules and the VPDI rules (Variable Principal Debt Instrument) which apply to bank accounts. Most New Zealand eftpos cards will work in cash machines in Australia.

6. Make sure you know the grey list: When investing in Aussie shares, there's a list of "exempt" companies (IR871 on the IRD website). Very roughly, about 500 qualify, out of a possible 2000. The ones which trip up investors are the likes of News Corp (which isn't resident), mining stocks that are too small to be in the All Ords Index, listed property trusts and unit trusts. The advantage of the exempt shares is they will be taxed in the same way as New Zealand shares. In general, if you are not a trader, tax is paid on dividends, and capital gains are not taxed (take tax advice).

7. Buying shares outside the grey list: If your holdings are more than $50,000, the Foreign Investment Fund tax rules generally apply (again seek advice on your circumstances).

8. Not investing with professional fund managers: There are some great managers in New Zealand and Australia running Aussie funds. Can you beat their performance for an equal measure of volatility?

9. Research skills: Do you have good research skills? Do you have the time to do the research?

10. Tax, when buying direct vs a unit trust: Buying shares directly generally means you are taxed only on dividends. If those dividends are high, you could be paying more tax than someone in a unit trust. Under the FIF rules, tax is payable on a maximum 5 per cent gain across a portfolio. Much navel gazing has taken place on this point, but it's swings and roundabouts.

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.