The investment tax hack Sir Michael Cullen probably never meant to give us

It is not often that a finance minister leaves office having quietly gifted New Zealand families one of the most powerful tax-free investment structures in the country, without apparently meaning to. But that, in essence, is what Sir Michael Cullen did when he set the Foreign Investment Fund (FIF) de minimis threshold at its original level. The threshold was designed to spare small investors from complex tax calculations. What it also did, for anyone paying close enough attention, was create a permanently tax-exempt compounding vehicle of genuinely extraordinary potential. Governments of both flavours came and went. Inflation rose. Markets rose considerably more. The threshold sat there, untouched, like a leftover’s container at the back of the fridge that nobody thought to open.

Budget 2026 has finally opened the fridge. The current Government has doubled the threshold to $100,000, framing it as simplification. It is not wrong. But for anyone who understands what compound growth does over a very long investment horizon, it is rather more than that. Those who know me will raise an eyebrow here. I have spent most of my career arguing that PIE funds are the single best structure available to New Zealand investors, and I stand by that. But this significant opportunity sits outside the PIE world entirely, as it is simply too good to ignore. In my own portfolio, I am doing exactly what this article outlines, while also still investing in my favoured PIE funds. The mathematics and financial outcomes in real dollars are too compelling to ignore.

The tax rules, and stay with me through the complexity……

The FIF regime, universally known as FIF because nobody has time to say Foreign Investment Fund twice, taxes New Zealand residents on offshore investments by applying a deemed return each year, which is termed the Fair Dividend Rate method, or Comparative Value method. FIF exists to stop investors accumulating wealth offshore by never realising gains or receiving dividends. However, if the total original cost of all offshore FIF investments is $100,000 or less, the FIF rules do not apply at all. Below that threshold, tax only applies to actual dividends received. This “de minimis” threshold was set by Labour Government around 2007, and left untouched through administrations of both parties until Budget 2026 doubled it. I am picking that nobody ran the numbers on 65-year compounding scenarios.

The accumulating ETF and why structure matters

A below the $100,000 threshold investment is exempt from FIF. That eliminates one tax. Two remain, being capital gains and dividends. New Zealand does not appear to have a general capital gains tax, at least one that is actively enforced for listed shares (more on this later), so growth over 65 years is untaxed on sale. Dividends are handled by choosing an accumulating ETF, which is an offshore listed fund that reinvests all dividends internally rather than distributing them. No cash reaches the investor. Nothing to report. Nothing to pay.

The result is that a $99,000 investment in an accumulating global equity ETF generates no taxable income in New Zealand for its entire life, reflecting that its purchase price is below the $100,000 threshold. No FIF. No dividends. No capital gains. Investors then can sit back and enjoy the accumulating tax-free returns for ever. It compounds undisturbed into perpetuity. This is not a scheme. It is Parliament’s rules, applied as written nearly 20 years ago.

The numbers. Drum roll please!

The MSCI World Index has returned approximately 9.4% per annum over its history when dividends have been reinvested.  This is across wars, recessions, oil shocks, financial crises, and pandemics. The market recovered from all of them. Here is what $99,000 invested and left entirely alone grows to over 65 years:

Past performance is not a guarantee of future results. Gross of fees and taxes. Nominal figures. Illustrative only.

At the MSCI World historical return rate, $99,000 becomes $34 million over 65 years. At a cautious 8%, still $14.7 million. The arithmetic is correct. This is simply what happens when a reasonable return meets a very long-time horizon and the discipline not to interfere. As Einstein once put it, compounding is the eighth wonder of the world.

Some important things to get right

The strategy is simple but as always, the execution requires a bit of care. First up, getting qualified tax and investment advice is always important.  A second element is keeping detailed records showing NZ dollar acquisition cost of the offshore share investment, as this might be critical way out in the future to show that the investment was made below the $100,000 threshold. Finally, and most importantly, is never buying any more FIF investments. Any additional purchase would increase the cost basis and trigger FIF tax across the entire directly held offshore share portfolio. The trick here is to invest in an offshore share asset like an ETF once, below the $100,000 threshold, and leave it entirely alone. You can sell some of it, but never ever buy any more.

One risk worth knowing about

One qualification needs to be made to the statement that New Zealand does not tax capital gains. Under existing law, gains are taxable where the primary intent of acquiring an asset was to profit on its sale. Inland Revenue has already applied this logic to bitcoin and gold with some enthusiasm. An accumulating ETF pays no dividends, which leaves the door ajar to the same argument. In practice this risk appears unlikely for a broadly held global equity fund, and Inland Revenue has shown no appetite to go there. But it is a risk worth knowing about. For a fuller explanation of this risk read my article The shark already has teeth.

The bottom line

Sir Michael Cullen set the FIF threshold at its original level. Budget 2026 has doubled it. Neither decision was made with the long-term investor in mind. The mathematics, however, do not care about intent.

An investor who puts $99,000 into a low-cost accumulating global equity ETF and never touches it again could be sitting on a genuinely life-changing sum decades later. No FIF. No dividend tax. No capital gains tax. Sixty-five years of uninterrupted compounding. In my own family, we are doing exactly this. The discipline to leave it alone for six and a half decades is the harder part. But then, the best investment decisions usually are.

The logic is simple: $99,000 invested in the right structure, left alone, could become something extraordinary. The hard part is not the investing. It is the leaving alone. Sir Michael would probably appreciate the irony. He spent his career trying to make New Zealanders better off. It turns out he may have succeeded in ways that nobody at Treasury ever ran a spreadsheet on.

Important Notice

Please note this article is provided for informational purposes only and is not intended to be tax advice.