A type of attributing interest in a foreign investment fund for which a person may not use the fair dividend rate method (Colchester Multi-Strategy Global Bond Fund PLC – The Colchester Global Green Bond Enhanced Currency Fund- NZD Hedged Accumulation Class Z Shares).

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 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 Colchester Global Green Bond Enhanced Currency Fund Share Class: NZD hedged Accumulation Class – Z Shares are an attributing interest 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. The Fund is part of The Colchester Multi-Strategy Global Bond Fund PLC and incorporated under the laws of Ireland.

The Colchester Multi-Strategy Global Bond Fund PLC 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 invests in a broadly diversified portfolio of eligible intermediate term domestic and global fixed interest and money market securities.  The Fund has various share classes denominated in different currencies, including USD, AUD, GBP, EUR and NZD that provide holders of those classes of shares with an interest in the pool of investments held by the Fund.  The NZD class of shares of the Fund is denominated in New Zealand dollars.  The Fund has foreign currency hedging arrangements in place which effectively provide investors in the NZD class of the Fund 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 this basis, where a New Zealand resident invests in the NZD Share Class of the Fund, and holds an attributing interest in the FIF, I consider that it is appropriate for the investor holding that investment 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. It 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 The Colchester Multi-Strategy Global Bond Fund PLC; 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 shares issued in The Colchester Global Green Bond Enhanced Currency Fund, a sub-fund of The Colchester Multi-Strategy Global Bond Fund PLC. This class of shares provides an interest in the underlying assets of the Fund that predominantly (i.e. 80% or more by value at any time in the income year) consist of financial arrangements such as international fixed interest securities; and
• 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 issuer for the purpose of eliminating to the extent possible any exchange rate risk for New Zealand investors where this removes 80% to 125% of foreign currency risk for the assets.

Conditions

It is a condition of this determination that the investment in the Fund is part of an overall arrangement that seeks to provide the New Zealand resident investor with a return that is economically equivalent to a debt instrument denominated in New Zealand dollars. 

In addition, it is a condition of this determination that an investor will not be excluded from using the FDR method to calculate FIF income from an interest where the absolute notional value of the Fund’s investment in global fixed income securities (directly or indirectly via derivatives) plus the fair value of the related hedges plus cash and cash equivalents (together referred to as “the numerator”) is 80% or less than the combined total of the numerator plus the absolute nominal value of other derivatives (together referred to as “the denominator”) for a continuous period of 45 days. For the purposes of calculating the numerator and denominator hedging to NZD is excluded. Should this occur, the determination will cease to apply from the first day of the quarter immediately following the expiry of the 45 day period.

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;

"New Zealand resident" means a person that is resident in New Zealand for the purposes 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 Colchester Global Green Bond Enhanced Currency Fund, a sub-fund of The Colchester Multi-Strategy Global Bond Fund PLC.

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 fair dividend rate method to calculate FIF income from the interest.

Application Date

This determination applies for the 2024-2025 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 day, 01 July 2024.

Iain McConville

Taxation Specialist