Fair dividend rate method not to be used for a type of attributing interest in a foreign investment fund

Determination

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 Policy Manager under section 7 of the Tax Administration Act 1994.

Discussion (which does not form part of the determination)

Units in a non-resident issuer to which this determination applies are an attributing interest in a foreign investment fund (FIF) for New Zealand resident investors. New Zealand resident investors are required to apply the FIF rules to determine their tax liability in respect of their units in the non-resident issuer each year.

New Zealand resident investors who satisfy the requirements of section EX 40(7) of the Act will qualify to use the fair dividend rate (FDR) method to determine their tax liability in respect of their units in the non-resident issuer, and are not prevented from using the FDR method pursuant to section EX 40(8) and EX 40(9) of the Act in the absence of a determination under section 91AAO of the Tax Administration Act 1994.

However, I consider that it is not appropriate for New Zealand resident investors in this arrangement to use the fair dividend rate method. Due to the nature of the overall arrangement (as described to me by the applicant), application of the FDR method would impose unnecessarily high compliance costs on New Zealand investors each of whom would be required to perform a substantial number of quick sale calculations and associated foreign exchange calculations every time they withdraw funds from the non-resident issuer during the year.

Scope of determination

The investments to which this determination applies are units in a non-resident issuer which:

1. is the Macquarie Cash Management Trust, a unit trust that is established and tax resident in Australia;
2. is managed by Macquarie Investment Management Limited (Macquarie), a company incorporated and tax resident in Australia, or an entity which is associated with Macquarie;
3. issues Australian dollar denominated units (not being fixed rate shares or non-participating redeemable shares) to New Zealand resident investors;
4. invests proceeds from the issue of units in assets which are Australian dollar denominated financial arrangements, currently short-term Australian dollar denominated debt securities;
5. does not invest in any currency arrangements which provide an overall economic return as if the securities were denominated in New Zealand dollars;
6. may make distributions of income (if any) to the unit holders in the form of cash or additional units but does not guarantee that any income will be derived or that a distribution will be made.

Interpretation

In this determination, unless the context otherwise requires-

"Associated" mean associated persons under sections OD 7 and OD 8 of the Act;

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

"Fixed rate share" means a fixed rate share under section LF 2(3) of the Act;

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

"Non-participating redeemable share" means a non-participating redeemable share under section CD 14(9) of the Act;

"The Act" means the Income Tax Act 2004.

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 2007-08 and subsequent income years.

Dated at Wellington this 8^th day of February 2008.

David Carrigan
Policy Manager
Inland Revenue