A type of attributing interest in a foreign investment fund for which a person may not use the fair dividend rate method (Wellington Management Portfolios (Dublin) Plc: Global Bond Fund - NZD 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 Investigations Manager, Investigations and Advice, under section 7 of the Tax Administration Act 1994.

Discussion (which does not form part of the determination)

Units in the Wellington Management Portfolios (Dublin) Plc: Global Bond Fund (WMP) - New Zealand dollar denominated share class (NZD Share Class) 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 investment in shares in WMP each year.

WMP invests in global fixed interest securities for which WMP has made foreign currency hedging arrangements to provide investors with a New Zealand dollar denominated return on these debt instruments.  

Section EX 46(10)(c) of the Income Tax Act 2007 would, if not for this determination, require the use of the fair dividend rate (FDR) method.

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 New Zealand dollar denominated shares in WMP, I consider that it is appropriate for the investor holding that investment in WMP to be excluded from using the FDR method for the 2014-2015 and subsequent income years.

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 FIF:
   1. is incorporated in Ireland and issues multiple classes of shares;
   2. is known at the date of this determination as Wellington Management Portfolios (Dublin) Plc: Global Bond Fund (WMP);
   3. invests into an undivided pool of global fixed interest securities;
   4. undertakes hedging in proportion to the shares issued in each currency. The NZD hedging therefore only covers the proportion of the pool of assets that corresponds to the number of NZD shares.
2. The investors in WMP:
   1. invest in that pool of global fixed interest securities through classes of shares that are denominated in various currencies including one which is denominated in New Zealand dollars (NZD shares);
   2. that are New Zealand residents invest in New Zealand dollar class of shares of WMP.

Interpretation

In this determination unless the context otherwise requires:

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

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

"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 not use the FDR method to calculate FIF income from the interest.

Application Date

This determination applies for the 2014-2015 and subsequent income years. However, under section 91AAO(3B) of the Tax Administration Act 1994, this determination also applies for an income year beginning before the date of this determination for an investor in WMP that chooses that the determination applies for that year.

Dated this 16th day of March 2015.

John Trezise
Investigations Manager