A type of attributing interest in a foreign investment fund for which a person may use the fair dividend rate method (Units in the Plato Global Macro Equity Fund– Class Z)

Reference

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

Discussion (which does not form part of the determination)

Units in the Plato Global Macro Equity Fund– Class Z (“Plato Global Fund”), to which this determination applies, are attributing interests in a foreign investment fund (“FIF”) for New Zealand resident investors when none of the exemptions in section EX 29 to EX 43 of the Income Tax Act 2007 apply.

Under EX 32 of the Income Tax Act 2007 an exemption may arise for an Australian Unit Trust and a New Zealand resident investor so that a person’s rights in the unit trust in an income year are not an attributing interest.  The determination will only apply when an attributing interest arises. 

New Zealand resident investors are required to apply the FIF rules to determine their tax liability in respect of their Plato Global Fund investments each income year. 

The investments held by the Plato Global Fund may consist predominantly of financial arrangements providing funds to a person. In addition, some New Zealand resident investors may hedge their attributing interests in the Plato Global Fund back to New Zealand dollars. Therefore, section EX 46(10)(cb) of the Income Tax Act 2007 could apply to prevent those investors from using the fair dividend rate method in the absence of a determination under section 91AAO of the Tax Administration Act 1994.

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 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.

Notwithstanding that the Plato Global Fund may have assets predominantly comprising financial arrangements and New Zealand resident investors may enter into related New Zealand dollar hedging arrangements, the overall arrangement contains sufficient risk so that it is not akin to a New Zealand dollar-denominated debt instrument. Accordingly, I consider it is appropriate for New Zealand resident investors to use the fair dividend rate method to calculate FIF income from their attributing interest in the Plato Global Fund.

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:

1. The non-resident issuer:
   • Is known at the date of this determination as the Plato Global Macro Equity Fund;
   • Invests in long and short positions in equity, bond, currency and commodity markets, as well as making other investments;
   • Is operated with separate classes of units.
2. The attributing interest consists of class Z units issued in the Plato Global Fund, a class of units that provides an interest in the underlying assets of the Plato Global Fund that predominantly (by notional exposure) invests in long and short positions in equity, bond, currency and commodity markets, as well as making other investments. Exposure to these markets is primarily achieved through the use of exchange traded futures or over the counter derivatives such as currency forward contracts.  For the purposes of covering the derivative positions, the Plato Global Fund also holds cash and cash equivalents which may mean that the underlying assets of the fund predominantly (i.e. 80% or more by value at a time in the income year) consist of financial arrangements; and
3. The investment interest attributable to the class Z units are subject to currency hedging arrangements undertaken by the New Zealand resident investors for the purposes of eliminating exchange rate risk on a highly effective basis.

This determination is made subject to the following conditions:

1. The investment in the Plato Global Fund is not part of an overall arrangement that seeks to provide the New Zealand resident investor with a return that is equivalent to an effective New Zealand dollar denominated interest exposure.
2. The absolute value of the Plato Global Fund’s notional derivative exposure must not fall to 20% or less of its Net Asset Value for a continuous period of 45 days. Should this occur, the determination ceases to apply from the first day of the following quarter.

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;

“Plato Global Fund” means an Australian Unit Trust known at the date of this determination as the Two Trees Global Equity Macro Fund – Class Z.

Determination

This determination applies to an attributing interest in a FIF, being a direct income interest in the Plato Global Fund. This is a type of attributing interest for which the investor may use the fair dividend rate method to calculate FIF income from the interest.

Application Date

This determination applies for the 2023 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 apply for the income year.

Dated this 25th day of January 2023

Iain McConville

Technical Lead