As a US tax practitioner in New Zealand, I’m frequently asked the question “Is Sharesies a wise investment for US citizens?”. Well…it can be, but frequently isn’t.
For those who aren’t familiar with Sharesies, here’s a brief explainer of the tax implications for US citizens in New Zealand.
Sharesies is an NZ based investment platform, which allows investors to purchase shares across a very wide range of markets. Sharesies offers fractional shares, meaning you’re able to own a portion of a share, for a lower cost than if you were to buy a full share.
Think for example of Apple stock, currently trading around US$169 per share. Platforms like Sharesies allow you to purchase a fraction of the Apple stock, rather than a full $169 share.
This has opened up share trading to a far wider audience in New Zealand, and has become hugely popular in a short period of time.
When investments are made with US taxation in mind, then Sharesies can sometimes serve as an excellent investment vehicle. However, commonly, investments are made without this US consideration.
The main obstacle which US citizens face with Sharesies are PFICs, and unfortunately Sharesies is littered with them (it is considered by some that Sharesies itself is a PFIC).
As a brief explainer, a PFIC (Passive Foreign Investment Company) is a non-US company which generates at least 75% of its income from passive sources. These companies commonly have names such as the NZX Top 100 Fund, or the Asian Tech fund (these are fictional names). They usually have no business activities, and exist solely to invest in other companies.
Companies which actively earn their income through business (ie Air New Zealand, Spark etc.) are not PFICs.
For US citizens, PFICs are subject to not only punitive taxation by the US, but also punitive reporting on Form 8621.
Each separate PFIC that you are invested in, requires its own Form 8621 each year, which can be very costly to report.
Specifically, PFICs are taxed by the IRS on their unrealized gains each year, this means the increase in the value of the fund (regardless of whether you sell). In addition, the reporting requirements are complex, difficult and costly. Even by IRS estimates, each PFIC should take approximately 32 hours to report each year, from start to finish.
For example, if you owned shares in a PFIC that at the beginning of the year were worth $1000, and at the end of the year were worth $1500, then you may face a tax on that $500 of growth, despite not withdrawing (selling) your cash.
PFICs have a reporting threshold of $25,000 USD across all investments combined. This means, if you had $20,000 in your KiwiSaver (assuming it’s a PFIC), and $6000 in Sharesies, then you’ve met the $25,000 threshold across all investments.
Its important to keep in mind though, it is rare that we see a $6000 investment in just one company in Sharesies, rather, investors tend to spread their money across multiple funds.
The Issue for US citizens
Now that we understand what Sharesies is, and also what a PFIC is, the issues for US citizens are quite apparent.
We frequently see Sharesies investments turn into incredibly expensive problems to fix for US citizens. Sharesies actively encourages its members to diversify, and spread their investment across a number of different companies and funds. Of course, this would usually be seen as a wise financial decision (to diversify).
From a US perspective however, this can then result in a client having a large number of PFIC investments, but all with a low value. Its not uncommon for us to see clients with 20 PFIC investments, each worth only $50.
As you’ve probably guessed by now, this would likely mean 20 separate Forms 8621 need to be filed, one for each PFIC. The compliance fees are often higher than the actual investment itself.
Whilst PFICs aren’t necessarily all bad, investing small amounts across multiple funds can create thousands of dollars of reporting requirements, with even low value investments. Investments in PFIC usually require a large sum to be invested, to ensure that the returns each year are greater than the compliance costs.
A PFIC takes just as long to report when it is with $500, as when its worth $50,000. As a result, even low value investments are costly to report.
Sharesies encourages diverse investments by its customers, and has created an easy-to-use platform for first-time and experienced investors. It could however be argued that Sharesies have taken a laissez-faire approach to warning its US citizen clients to seek advice before investing.
Whilst the usual disclaimers exist on their website, their effectiveness is debatable, given the amount of US citizen investors we see get into a large compliance issues as a result. Personally, I believe that the caution suggested to investors is insufficient.
For US citizen investors, taking a moment to seek US tax advice before any investments can save many thousands in compliance fees, stress, and potentially tax too.
It should be noted that the above is not financial advice, and is a review of Sharesies solely from a US tax perspective.
For any questions, please feel free to contact US Global Tax on 093732949.