FDR vs CV: which method is better?
If FIF applies to you, there are two ways to work out your taxable income, and you're allowed to use whichever one leaves you with the lower figure. The only real constraint is that you have to apply the same method across all your FIF holdings in a given year. You can't run FDR on some shares and CV on others.
The Fair Dividend Rate (FDR) method
FDR ignores how your portfolio actually performed. You take its market value on 1 April and treat 5% of that as your income for the year, full stop.
So if you started the year with $80,000 of overseas shares, your FIF income is $4,000, regardless of whether the portfolio doubled or halved. The appeal is that you only need one number to work it out, your opening balance, and you know what you'll owe in advance.
The downside shows up in years where your portfolio went sideways, dropped, or paid you a lot in dividends. In those cases FDR can leave you paying tax on income you didn't really make, and CV will usually come out lower.
The Comparative Value (CV) method
CV looks at what actually happened. It takes the change in your portfolio's value over the year and adds any dividends you received.
Minimum: $0. CV can never go below zero
If that figure comes out negative, it's treated as zero. You never get a negative FIF income, but you can get to zero, which is the main reason people reach for CV in a bad year. Say you opened at $80,000, closed at $68,000, and collected $1,500 in dividends. The $12,000 drop more than swallows the dividends, so your CV income is floored at $0. FDR would have taxed you on $4,000 that same year.
The trade-off is that CV punishes a good year. If your portfolio climbed more than 5%, CV will hand you a bigger number than FDR would have. It also needs more from you at tax time, since you have to know your closing value and total dividends, not just where you started.
A quick comparison
| FDR | CV | |
|---|---|---|
| Formula | Opening × 5% | (Closing − Opening) + Dividends |
| Data needed | Opening value only | Opening, closing, dividends |
| Good years (portfolio up >5%) | ✓ Usually lower | ✗ Usually higher |
| Bad years (portfolio flat/down) | ✗ Can be higher | ✓ Can be lower or zero |
| Can result be zero? | No (always 5% of opening) | Yes (floored at $0) |
| Complexity | Simple | Slightly more record-keeping |
Can I switch methods each year?
You can. There's no lock-in between years, so it's fine to use FDR one year and CV the next depending on how things went. The same-method rule only applies within a single year, across your holdings.
Most people just calculate it both ways each year and go with whichever is lower. Our calculator runs both and tells you which one comes out ahead, so you don't have to do it twice by hand.
What about the quick sale adjustment?
There's one wrinkle worth knowing about. If you buy shares in a company and sell them again inside the same tax year, an extra adjustment gets added to your FDR income. It exists to stop people buying in just after 1 April and selling just before 31 March to dodge the deemed 5%. Our calculator handles a simplified version of this.
FIF Sorted is an estimation and education tool only. It does not constitute tax advice and should not be relied upon as a substitute for professional advice tailored to your situation. Tax rules can change, so always verify with Inland Revenue (IRD) or a qualified tax professional before filing.