The Hatch FIF report calculates your FIF income using the Comparative Value (CV) and Fair Dividend Rate (FDR) methods as laid out by the IRD. Our report takes the hard work out of FIF (you’ll see what we mean when you read about the calculations below!), but you should still review your details to make sure they’re accurate.
This article explains the calculations, you’ll find all the numbers referred to here in the Excel file included with your report.
The CV Method
The comparative value method compares the market value of your investments at the beginning and end of the tax year (along with the value of any buys, sells, and dividends during the year) to calculate your realised & unrealised gain or loss for the year.
The CV formula:
CV Income = Closing Value + Sales Proceeds + Dividends - Opening Value - Cost of Purchases
This calculation is made for each of your investments and then summed up to give your total CV income for the tax year. Note that if your income is calculated to be a negative number, it’ll be reported as 0 - in most cases a loss cannot be claimed on FIF income (see IRD's FIF guide).
Note: In Hatch FIF reports, brokerage costs are accounted for in Sales Proceeds and Cost of Purchases figures (e.g. a purchase of $300 of shares with $3 of brokerage is taken as $303, and a similar sale would be $297).
The FDR Method
The FDR method assumes a return on investments of 5% of their opening market value, plus a quick sale adjustment if you have bought and sold any of the same investment within the tax year (this is where it can get a bit tricky!).
The FDR formula:
FDR Income = Opening Market Value x 5% + Quick Sale Adjustment
Quick Sales Adjustments
A quick sale occurs when you buy and then sell any shares of the same investment during a year. There are two ways of calculating the quick sales adjustment for an investment:
Peak Holding Adjustment = 5% x peak holding differential x average cost
Peak holding differential is the highest amount of shares of an investment owned during the year minus the amount of shares owned at the beginning or end of year (whichever gives the smaller result)
Average cost is the average cost to purchase a share of that investment over all of the purchases made during the year.
Quick Sale Gains = Sales Proceeds (from quick sales) + Pro Rata Share of Dividends - (Average Cost x Quantity of Shares (that were ‘quick sold’))
Pro rata share of dividends means the portion of any dividends received that belonged to shares which were ‘quick sold’ - e.g. if an investor received $100 in dividends, and half of their shares were later quick sold in a quick sale, then $50 of those dividends would be considered part of the quick sale gain.
Both calculations are made for each investment and then added to get a total income. The lesser of either the total peak holding adjustments or the total quick sale gains is then used as the overall quick sale adjustment for the portfolio (if the total quick sales gain for a portfolio is negative, the adjustment is limited to 0).
Note: Whether or not a quick sale has occurred is determined using a Last-In-First-Out (LIFO) approach - meaning that each time you sell shares you are considered to be selling the ones you bought most recently first.
An investor starts the tax year with 100 shares of Company A, during the year they buy 50 more shares at $10 each, then they sell 75 shares of the company at $12 each before the year ends, leaving them with 75 shares on 31 March.
The peak holding adjustment for this investment = 5% x (150 - 100) x $12 = $30
The quick sale gains for this investment = 50 x $12 - 50 x $10 = $100
(75 shares were sold during the year, but only 50 were considered to have been quick sales as they were also bought that year)
All of this can get a bit hairier when your investments are also impacted by corporate actions - stock splits, symbol changes, or mergers and acquisitions - you can read more about what happens then in our guide to FIF transactions.
You can find more detail on both methods and examples in the IRD’s FIF Guide.
Note: Your tax obligations are unique to you - if you're unsure, we recommend you seek professional tax advice. Your situation may change over time; it’s your responsibility to keep up to date with changes.