Use of fair dividend rate method for a type of attributing interest in a foreign investment fund (ISAM Systematic Trend – Class Q shares)

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 Technical Specialist, under section 7 of the Tax Administration Act 1994.

Discussion (which does not form part of the determination)

Class Q shares in ISAM Systematic Trend, to which this determination applies, are attributing interests in a foreign investment fund for New Zealand resident investors.

ISAM Systematic Trend holds directly or indirectly assets of which 80% or more are financial arrangements providing funds to a person. In addition, some New Zealand resident investors hedge their attributing interests in Class Q shares in ISAM Systematic Trend back to New Zealand dollars. Therefore, section EX 46(10)(cb) of the Income Tax Act 2007 would apply to prevent those investors from using the fair dividend rate method in the absence of a determination under section 91AAO of the Tax Administration Act 1994.

I consider that it is appropriate for New Zealand resident investors to use the fair dividend rate method to calculate foreign investment fund income from their attributing interests in Class Q shares in ISAM Systematic Trend. Although ISAM Systematic Trend directly or indirectly invests in assets predominantly comprising financial arrangements and New Zealand resident investors may enter into New Zealand dollar hedging arrangements, the overall arrangement contains sufficient risk so that it is not similar to a New Zealand dollar-denominated debt investment.

Scope of determination

This determination applies to Class Q shares held by New Zealand resident investors in ISAM Systematic Trend.

The ISAM Systematic Trend’s investment objective is to grow the value of its assets, providing returns with low correlations to the stock and bond markets through the implementation of systematic trading models. ISAM Systematic Trend achieves its investment objectives by primarily investing in ISAM Systematic Trend Master. ISAM Systematic Trend Master trades primarily in global futures, swaps and forward contracts including with respect to stock indices, interest rates, currencies, energy commodities, agriculture and metals, as well as in over-the-counter spot foreign exchange and metals transactions.

This determination is made subject to the following conditions:

1. The investment in Class Q shares in ISAM Systematic Trend is not part of an overall arrangement that provides the New Zealand resident investor with a return that is equivalent to an effective New Zealand dollar denominated interest exposure.
2. The absolute value of ISAM Systematic Trend’s notional derivative exposure must not fall to 20% or less of its Net Asset Value for a continuous period of 45 days. Should this occur, the determination ceases to apply from the first day of the following quarter.

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;

“ISAM Systematic Trend” means a Cayman Islands exempted company incorporated on 9 February 2010 known at the date of this determination as ISAM Systematic Trend;

“ISAM Systematic Trend Master” means a Cayman Islands exempted company incorporated on 9 February 2010 known at the date of this determination as ISAM Systematic Master; and

“The investor” means the person who has a share in ISAM Systematic Trend.

Determination

This determination applies to an attributing interest in a foreign investment fund, being a direct income interest in Class Q shares in ISAM Systematic Trend. This is a type of attributing interest for which the investor may use the fair dividend rate method to calculate foreign investment fund income from the interest.

Application Date

This determination applies for the 2020 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 apply for the income year.

Dated this 29th day of November 2019.

Haydn Clark
Technical Specialist