A type of attributing interest in a foreign investment fund for which a person may not use the fair dividend rate method (iShares Green Bond Index Fund – NZD Share Class)

Reference

This determination is made under section 91AAO(1)(b) of the Tax Administration Act 1994. This power has been delegated by the Commissioner of Inland Revenue to the position of Technical Specialist – Network under section 7 of the Tax Administration Act 1994.

Discussion (which does not form part of the determination)

Shares in the New Zealand Dollar (NZD) denominated class of the iShares Green Bond Index Fund (“the Fund”) as part of the BlackRock Fixed Income Dublin Funds public limited company (“BRFI”) incorporated under the laws of Ireland to which this determination applies are an attributing interest in a foreign investment fund (“FIF”) for New Zealand resident investors. BRFI is structured as an umbrella fund with segregated liability between sub-funds. These sub-funds do not have a separate legal personality.

New Zealand resident investors are required to apply the FIF rules to determine their tax liability in respect of their investment in shares in the NZD denominated class of the Fund (“the NZD Share Class”) each year.

The Fund is a sub-fund of BRFI which invests in a portfolio of global fixed interest securities and other financial arrangements the proceeds of which are used to fund projects with direct environmental benefits.

The Fund has on issue a number of share classes that provide holders of that class with an interest in a pool of financial instruments held by the Fund. The NZD Share Class is a share class denominated in NZD.  Foreign currency hedging arrangements are to be put in place which effectively provide investors with a New Zealand dollar denominated return on the financial arrangements held by the Fund.     

Section EX 46(10)(c) of the Income Tax Act 2007 would not apply to prevent the use of the FDR method for interests in the NZD Share class but would apply if the Fund represented a separate foreign company and the NZD Share Class was the only class of share on issue.

The policy intention is that the FDR method of calculating FIF income should not be applied to investments that provide a New Zealand resident investor with a return similar to a New Zealand dollar denominated debt investment. It is appropriate for the Commissioner to take into account the whole of the arrangement including any interposed entities or financial arrangements in ascertaining whether an investment in a FIF provides the New Zealand resident investor with a return akin to a New Zealand dollar denominated debt investment.

On that basis, where a New Zealand resident invests in the NZD Share Class of the Fund, I consider that it is appropriate for them to be excluded from using the FDR method. 

Scope of determination

This determination is issued on the basis of information provided to the Commissioner before the date of this determination and applies to an attributing interest in a FIF held by New Zealand resident investors in a non-resident issuer where: 

• This non-resident issuer:
  • is incorporated in Ireland and issues multiple classes of shares; and
  • is known at the date of this determination as BlackRock Fixed Income Dublin Funds public limited company; and
  • is structured as an umbrella fund with segregated liability between sub-funds.
• The attributing interest consists of the New Zealand dollar denominated class of share, issued in the iShares Green Bond Index Fund, a sub-fund of BlackRock Fixed Income Dublin Funds public limited company, that provides exposure solely to a portfolio predominantly of fixed interest securities and other financial arrangements  
• The investment assets attributable to the New Zealand dollar denominated class of share are subject to foreign currency hedging arrangements undertaken by the non- resident for the purpose of eliminating to the extent possible any exchange rate risk for New Zealand investors on a highly effective basis.<

Interpretation

In this determination, unless the context otherwise requires-

"Fair dividend rate method" means the fair dividend rate method under section YA 1 of the Income Tax Act 2007; 

"Financial arrangement" means financial arrangement under section EW 3 of the Income Tax Act 2007;

"Foreign investment fund" means foreign investment fund under section YA 1 of the Income Tax Act 2007; 

"Non-resident" means a person that is not resident in New Zealand for the purposes of the Income Tax Act 2007;

"The Fund" means the iShares Green Bond Index Fund, a sub-fund of BlackRock Fixed Income Dublin Funds public limited company. 

Determination

An attributing interest in a FIF to which this determination applies is a type of attributing interest for which a person may not use the FDR method to calculate FIF income from the interest.

Application Date

This determination applies for the 2022-2023 income year and subsequent income years.
However, under section 91AAO(3B) of the Tax Administration Act 1994, this determination does not apply for a person and an income year beginning before the date of the determination unless the person chooses that the determination applies for the income year.

Dated on this 14th day of October 2022.

Iain McConville 
Technical Specialist