A type of interest in a foreign investment fund for which a person may not use the fair dividend rate method (Dimensional Trusts - Global Bond Sustainability Trust NZD 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 Team Lead - Legal Services under section 7 of the Tax Administration Act 1994.

Discussion (which does not form part of the determination)

Investment in the NZD Class of units of the Dimensional Trusts - Global Bond Sustainability Trust (“the Fund”), an Australian Unit Trust and regulated managed investment scheme, are an attributing interest in a foreign investment fund (“FIF”) for New Zealand resident investors when none of the exemptions in section EX 29 to EX 43 of the Income Tax Act 2007 apply.

Under EX 32 of the Income Tax Act 2007 an exemption may arise for an Australian Unit Trust and a New Zealand resident investor so that a person’s rights in the unit trust in an income year are not an attributing interest.  The determination will only apply when an attributing interest arises. 

New Zealand resident investors are required to apply the FIF rules to determine their tax liability in respect of their Global Bond Sustainability Trust NZD Class investments each income year.

The Fund  invests in a broadly diversified portfolio of eligible intermediate term domestic and global fixed interest and money market securities.  The Fund has AUD and NZD unit classes that provide holders of those classes of units with an interest in the pool of investments held by the Fund.  The NZD class of units of the Fund are denominated in New Zealand dollars.  The Fund has foreign currency hedging arrangements in place which effectively provide investors in the NZD class of the Fund with a New Zealand dollar denominated return on the financial arrangements held by the Fund.

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 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 the NZD Unit Class of the Fund, and holds an attributing interest in the FIF, I consider that it is appropriate for the investor holding that investment 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 and 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 an Australian Registered Managed Investment Scheme;
   • Is known at the date of this determination as the Dimensional Trusts – Global Bond Sustainability Trust; 
   • Invests in financial arrangements including domestic and global fixed interest and money market securities; and
   • Is operated with separate classes of units.
2. The attributing interest consists of the New Zealand dollar denominated class of units issued in the Dimensional Trusts - Global Bond Sustainability Trust, a class of units that provides an interest in the underlying assets of the fund that predominantly (i.e. 80% or more by value at a time in the income year) consist of financial arrangements such as international fixed interest securities;  and
3. The investment interest attributable to the New Zealand dollar denominated class of units are subject to currency hedging arrangements undertaken by the non-resident issuer for the purpose of eliminating exchange rate risk for New Zealand investors on a highly effective basis.

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.

"New Zealand resident" means a person that is resident in New Zealand for the purposes of the Income Tax Act 2007; and

"Non-resident" means a person that is not resident in New Zealand for the purposes of 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 2022 income year 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 applies for the income year.

Dated on this 15th day of December 2021

Nathan Wallis

Team Leader, Legal Services