Use of fair dividend rate method for a type of attributing interest in a foreign investment fund

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 Investigations 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.

As the non-resident issuer invests solely in financial arrangements denominated in New Zealand dollars, section EX 46(10)(c) of the Act applies. In addition, the non-resident issuer may provide investors the ability to protect capital by locking in a minimum return equal to a proportion of the net asset value or index level achieved by the issuer in relation to the financial arrangements which may mean that section EX 46(10) (d) of the Act applies. Accordingly, New Zealand resident investors are prevented from using the fair dividend rate method in the absence of a determination under section 91 AAO of the Tax Administration Act 1994.

Despite the non-resident issuer having assets which 80% or more by value consist of financial arrangements denominated in New Zealand dollars and the ability of the Funds to lock in a proportion of the net asset value or index level achieved, the Commissioner considers that it is appropriate for New Zealand resident investors in this arrangement to use the fair dividend rate method. The overall arrangement (as described by the applicant) contains sufficient risk so that it is not akin to a New Zealand dollar-denominated debt instrument or one that effectively provides guaranteed returns.

Scope of determination

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

1. is a unit trust that is established and tax resident in Australia;
2. is managed by Liontamer Investment Management Pty Limited (Liontamer), a company incorporated and tax resident in Australia, or an entity which is associated with Liontamer;
3. issues New Zealand 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 financial arrangements, in relation to which the value is calculated by reference to either:
   1. The movement in the value of an underlying basket of:
      • Shares in companies listed on a recognised exchange;
      • Commodities;
      • Real property;
      • Non-NZD denominated fixed interest securities traded on a recognised market.
   2. The movement in an index or selected indices relating to the value of items listed in (i) above
   3. The movement in the value of an underlying actively managed fund or basket of funds investing in items listed in (i) above;
   4. The movement in currencies traded on a recognised market;
   5. Any combination of (i) to (iv);
5. if it invests in financial arrangements in relation to which the return is determined by reference in any way to underlying non-New Zealand dollar denominated fixed interest securities, does not invest in any currency arrangements which provide an overall economic return as if the securities were denominated in New Zealand dollars;
6. does not derive a fixed return in excess of 1.00% per annum;
7. may make distributions to the unit holders, but investors are not guaranteed that any income will be derived or that a distribution will be made;
8. may pay to an investor an amount exceeding the issue price of the unit on redemption, but at the time the unit is first issued does not guarantee the redemption price of a unit will exceed its issue price;
9. may enter into investments where the value is set by reference to a proportion of the net asset value or index level at specified times or over specified periods which could produce a minimum value in excess of the issue price of the units, but at the time units are first issued does not guarantee a return in excess of the issue price.

Interpretation

In this determination, unless the context otherwise requires -

"Associated" means associated persons under sections YB 1 to 21 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 LL 9 of the Act;

"Non-participating redeemable share" means a non-participating redeemable share under section CD 22(9) of the Act;

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

"Recognised exchange" means recognised exchange under section YA 1 of the Act;

"Recognised market" means a recognised exchange under section YA 1 of the Act, reading paragraphs (c) and (d) of the definition of recognised exchange to include currencies or financial arrangements;

"The Act" means the Income Tax Act 2007.

Determination

An attributing interest in a FIF to which this determination applies is a type of attributing interest for which a person may use the fair dividend rate method to calculate FIF income from the interest.

Revocation

Determination FDR 2010/02 replaces determination FDR 2008/01. Determination FDR 2008/01 is revoked from the 2010-11 income year.

Application date

This determination applies for the 2010-11 and subsequent income years.

Dated at Christchurch this 28th day of May 2010.

John Trezise
Investigations Manager
Inland Revenue