Determination the fair dividend rate method may not be used to calculate FIF income by investors in the iShares Core Global Aggregate Bond UCITS ETF – NZD hedged (Accumulating) 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 under section 7 of the Tax Administration Act 1994.

Discussion (which does not form part of the determination)

Shares in the NZD hedged (Accumulating) class (“NZD Class”) of iShares Core Global Aggregate Bond UCITS ETF (“Core Global”), are an attributing interest in a foreign investment fund (“FIF”) for New Zealand resident investors when none of the exemptions in sections EX 29 to EX 43 of the Income Tax Act 2007 apply. Core Global is a sub-fund of iShares III public limited company incorporated under the laws of Ireland. iShares III 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 the NZD Class of Core Global each year.

Core Global invests in a portfolio of global fixed interest securities. Core Global has on issue several share classes that provide holders of that class with an interest in the pool of securities held by Core Global. The NZD Class of Core Global is denominated in New Zealand dollars. Foreign currency hedging arrangements are in place which effectively provide investors in the NZD Class of Core Global with a New Zealand dollar denominated return on the financial arrangements held by Core Global.

Section EX 46(10)(c) of the Income Tax Act 2007 does not apply to prevent the use of the FDR method for interests in the NZD class of Core Global given that Core Global does not have a distinct legal personality separate from iShares III. As such, the entire portfolio of iShares III public limited company is taken into consideration when examining whether the 80% test is satisfied. However, Section EX 46(10)(c) would apply to prevent the use of the FDR method if Core Global represented a separate foreign company and the NZD 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 Class of Core Global, 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. It 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 incorporated in Ireland and issues multiple classes of shares; and
   • is known at the date of this determination as iShares III Public Limited Company; and
   • is structured as an umbrella fund with segregated liability between sub-funds.
2. The attributing interest consists of the NZD hedged (Accumulating) class of share, issued in iShares Core Global Aggregate Bond UCITS ETF, a sub-fund of iShares III Public Limited Company. This class of shares provides exposure solely to a portfolio predominantly of fixed interest securities and other financial arrangements; and
3. The investment assets attributable to the NZD hedged (Accumulating) 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.

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;

"Core Global" means the iShares Core Global Aggregate Bond UCITS ETF, a sub-fund of iShares III 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 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.

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 28th day of January 2025.

Iain McConville

Technical Specialist