WHERE AUSTRIAN ECONOMICS MEETS REAL WORLD ACTION

Above a line, New Zealand taxes foreign shares each year on income they may never pay. A Bill doubles the line to $100,000. The tax and the cliff stay.

You run a small joinery business in Christchurch. Six staff, a full order book, and most years a little left over.

For a few years you've put the spare cash into overseas shares through an app on your phone. An index fund here, a tech company there. Added up, you've paid about $48,000 for the lot.

This month you had $5,000 more and went to add it. Your accountant stopped you. Go past $50,000, she said, and the tax changes. Instead of tax on what the shares pay you, you're taxed every year on what the law assumes they earned. On all of it, not just the $3,000 over the line. Sold or not.

You put the $5,000 somewhere else. Not because it will earn more there. Because of a number in a tax act.

New Zealand taxes most overseas shares held by its residents under the foreign investment fund rules, the FIF rules. Under the main method, the fair dividend rate, you are taxed each year on 5% of the market value of your foreign shares at the start of the year. Dividends and gains are then not taxed separately. Individuals may instead pay on the year's actual return, gains not yet sold included, if that is lower. A year with a loss counts as zero, but the loss can never be used.

Small investors are exempt. If you are an individual, or the trustee of one of a narrow class of trusts, and your foreign shares cost $50,000 or less on every day of the year, the FIF rules don't apply. You are taxed on dividends received, and on gains when you sell only if you trade for profit. Go over $50,000 on a single day and the whole holding comes under the rules. In Inland Revenue's words, "the first $50,000 is not exempt".

On 10 September 2026 the government introduced a tax Bill that doubles the line to $100,000, for the income year that began on 1 April 2026.

The government's case is strong and deserves its own words. The exemption spares small investors the cost of complying with the FIF rules. The line "has not been adjusted since 2000", and $50,000 then is "around $95,000 in 2026 dollars", so proportionately more small investors are caught than in 2000. Officials found the line was skewing investment decisions as people approached it. Raising it means $34.4 million less tax over the forecast period.

The 5% has a case too. When the rules were announced in 2006, the ministers said they wanted investment decisions "driven by returns, not tax advantages", that the method "would not target capital gains", and that 5% was "a realistic rate based on historical returns".

The Bill is not yet law. Parliament was dissolved on 1 October for the election on 7 November, and submissions on the Bill are held over for a new Finance and Expenditure Committee in the next Parliament. Until the Bill passes, the line is $50,000.

This is real relief. It moves in the right direction, and officials are candid that the old line was bending people's choices.

Take every word of that as true. What follows is unaffected.

A number nobody discovered

The return an investor actually earns is discovered. It is the dividends that came in and the price a buyer paid, agreed by two parties who could each have walked away.

The 5% is not discovered. It is assessed: one figure written into the law and applied to every portfolio in every year, whether it holds a Swiss bank or a Boston biotech, whether markets rose or fell.

And the ministers rested it on history. Every investment manager gives the same warning: past returns are no guide to future ones. The government built its tax on the one thing the industry it taxes tells you never to rely on.

The line is no more discovered than the rate. $50,000 was a sum chosen in 2000. Its replacement is that sum adjusted for prices and then rounded up "to the nearest $10,000". Israel Kirzner, the Austrian economist who wrote most about how markets find prices, described prices as something people discover by trading. Applied to a tax rate, his idea gives the distinction that matters here: between numbers people discover and numbers someone sets. Both of these numbers are the second kind.

A tax on what you own

Under the line, you are taxed on money you received. Over it, you are taxed on money you might have made. Inland Revenue says so plainly: FIF income "can arise under the FIF rules even if there are no receipts during the year".

In practice that is a tax on what you own, not on what you earn. Each year it takes a slice of the value of the holding.

What the 5% costs each year, on $100,000 of foreign shares

In a falling year an individual can pay nothing. But a loss can never be set against anything, so the state shares the good years and not the bad ones. And in a good year the tax is due in cash, on shares that may have paid none. You sell some, or you pay from elsewhere.

That is a wealth tax in all but name, levied on one kind of asset.

What is not seen, and who pays

What is seen is the relief: holders of $50,000 to $100,000 of foreign shares leave the rules, and $34.4 million of tax goes uncollected.

What is not seen is everything the line decides before anyone files a return. The joiner's $5,000 went where the tax was lighter, not where the return was higher. The 2006 ministers wanted to "encourage greater diversification". The cliff does the opposite: it nudges small savers to keep their foreign holdings just under the line and the rest at home. Investments held through New Zealand funds taxed under their own rules, called PIEs, "do not count towards the de minimis", so the law steers people into one kind of vehicle as well.

Ludwig von Mises argued that without market prices, no one can tell whether capital has gone to its best use. He made the point about socialism, where there are no such prices at all; the same logic applies, on a smaller scale, wherever a rule overrides the price. Near the line, the question is no longer which investment will earn most. It is which one keeps you under $50,000.

Henry Hazlitt's lesson was to look past the group a policy helps, to everyone else it affects, and over time. Here that means asking who pays, and the answer is everyone the relief misses. The investor with $101,000 of foreign shares is taxed on all of it. Most family trusts never had the threshold at all, because it covers only individuals and a narrow class of trusts. The startup investor holds shares with no market price. And every future investor faces a line that shrinks as prices rise.

Risk, and an economy that taxes it

Hazlitt argued that taxes which take capital before it can build up fall hardest on risk-taking. A tax on gains not yet made does exactly that, every year.

It falls hardest on investments that take longest to pay. Eugen von Böhm-Bawerk, the Austrian economist of capital and time, showed why those matter: patient, roundabout investment is what makes an economy more productive. A tax collected every year from a holding that pays nothing until it is sold drains it before it can compound.

The sharpest case is a stake in an overseas startup. Its shares have no market price, so the rules usually fall back on a cost method: 5% of an assumed value that starts at what you paid and then grows by 5% a year by formula, whatever the company is really worth. On a $150,000 stake, in the first full year you hold it, that is $7,500 of taxed income, rising each year: about $2,925 of tax at 39%, paid in cash on shares you cannot sell and that may never pay. If the company fails, the method allows no loss. There are narrow exemptions for certain venture investments, but this is the general rule.

New Zealanders should be free to put their savings wherever they expect the return to justify the risk, including offshore. A rule that taxes the bet before it pays, and ignores it when it fails, tells them to bet less.

Wealth taxes have a record. The OECD counted 12 member countries with a net wealth tax in 1990 and four in 2017. It found revenues "very low", warned of "capital flight", and listed harm to saving, entrepreneurship and risk-taking among the case against.

The reasons are not hard to see. This tax applies to New Zealand residents, so the surest way to cut it is not to be one: the investor who can leave has a reason to, and the founder who might have come has a reason not to. That is the capital flight the OECD warned of. The capital that stays drifts towards the short, the safe and the domestic. And an economy grows on the risks its savers are willing to fund. None of this shows up in a revenue table. The firms that were never backed are not counted anywhere.

A line that drifts

The old line sat still for 26 years while prices nearly doubled. The new one is again a fixed sum. Officials concede the benefit "will erode gradually", and say indexing the line was "not considered owing to these fiscal constraints". If prices rise as they did from 2000 to 2026, $100,000 in 2052 will buy what about $53,000 buys today.

A threshold nobody indexes is a tax rise on a timer.

Indexing the line is the least the government's own reasoning requires. It would not touch the tax on gains not yet made, or the cliff.

This is analysis, not legal, tax or investment advice. Check your own position with an adviser.

Take the tax off gains nobody has made. Tax every resident's foreign shares the way New Zealand already taxes the small investor under the line: on dividends when they are received, and on gains when the shares are sold only by those who trade for profit.

Apply it to every investor, every trust and every vehicle alike. No line to stay under, no cliff, no assumed 5%, and no exemption for one kind of fund. Then what investors actually earn, not what the state assumes, decides where their savings go.

The test of intent is the 2006 ministers' own: investment decisions driven by returns, not tax. Only a rule with no line meets it. Indexing the threshold would be a step towards that rule, not the alternative.

Stay free,

Jean-Pierre

The Austrian Actor

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