Determination the fair dividend rate method may not be used to calculate FIF income by investors in the iShares Global Aggregate Bond ESG SRI UCITS ETF – EUR hedged (Accumulating) 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 Technical Specialist under section 7 of the Tax Administration Act 1994.

Discussion (which does not form part of the determination)

Shares in the EUR hedged (Accumulating) class (“EUR Class”) of iShares Global Aggregate Bond ESG SRI UCITS ETF (“the Fund”), are an attributing interest in a foreign investment fund (“FIF”) for New Zealand resident investors when none of the exemptions in sections EX 29 to EX 43 of the Income Tax Act 2007 apply.

New Zealand resident investors are required to apply the FIF rules to determine their tax liability in respect of their investment in the EUR Class of the Fund each year.

The Fund is a sub-fund of iShares III incorporated under the laws of Ireland. iShares III is structured as an umbrella fund with segregated liability between sub-funds. These sub-funds do not have a separate legal personality.

The Fund invests in a portfolio of global fixed interest securities. The Fund has on issue several share classes that provide holders of that class with an interest in the pool of securities held by the Fund. The EUR Class of the Fund is denominated in euros. Foreign currency hedging arrangements are in place which, to the extent possible, seek to provide investors in the EUR hedged class with a euro denominated return on the financial arrangements held by the Fund.

Additionally, foreign currency hedging arrangements are in place at the New Zealand resident investor level which effectively provide those investors in the EUR Class of the Fund with a New Zealand dollar denominated return on the financial arrangements held by the Fund.

Section EX 46(10)(cb) of the Income Tax Act 2007 does not apply to prevent the use of the FDR method for interests in the EUR Class of the Fund given that the Fund does not have a distinct legal personality separate from iShares III. As such, the entire portfolio of iShares III is taken into consideration when examining whether the 80% test is satisfied. However, Section EX 46(10)(cb) would apply to prevent the use of the FDR method if the Fund represented a separate foreign company and the EUR Class was the only class of share on issue.

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 that basis, where a New Zealand resident invests in the EUR Class of the Fund, and hedging to NZD is undertaken by the New Zealand resident investor, I consider that it is appropriate for them 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. It applies to an attributing interest in a FIF held by New Zealand resident investors in a non-resident issuer where:

1. This non-resident issuer:
   • is incorporated in Ireland and issues multiple classes of shares; and
   • is known at the date of this determination as iShares III; and
   • is structured as an umbrella fund with segregated liability between sub-funds.
2. The attributing interest consists of the EUR hedged (Accumulating) class of share, issued in iShares Global Aggregate Bond ESG SRI UCITS ETF, a sub-fund of iShares III. This class of shares provides exposure solely to a portfolio predominantly of fixed interest securities and other financial arrangements;
3. The investment assets attributable to the EUR hedged (Accumulating) class of share are subject to foreign currency hedging arrangements undertaken by the non-resident issuer for the purpose of eliminating to the extent possible any exchange rate risk for investors between the euro and the underlying portfolio currencies; and
4. The New Zealand resident investor maintains a facility to hedge their interest in the EUR Class of the Fund to NZD. The facility will remove 80% to 125% of the foreign currency risk for the attributing interest and be entered with the sole purpose and net effect of offsetting exposure to the foreign currency exchange movements.

Conditions

It is a condition that the investment in the Fund and hedging undertaken by the New Zealand resident investor are part of an overall arrangement that seeks to provide the New Zealand resident investor with a return that is economically equivalent to a debt instrument denominated in New Zealand dollars.

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;

"Non-resident" means a person that is not resident in New Zealand for the purposes of the Income Tax Act 2007;

"The Fund" means the iShares Global Aggregate Bond ESG SRI UCITS ETF, a sub-fund of iShares III Public Limited Company.

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 2025-2026 income year and subsequent income years.

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 17th day of July 2025.

Iain McConville

Technical Specialist