FDR 2008/01
Issued
22 Jan 2008

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

Determination FDR 2008/01 discusses the 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 Policy 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 40(9)(d) of the Act applies and New Zealand resident investors are prevented from using the fair dividend rate method in the absence of a determination under section 91AAO 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, I consider that it is appropriate for New Zealand resident investors in this arrangement to use the fair dividend rate method. The overall arrangement (as described to me by the applicant) contains sufficient risk so that it is not akin to a New Zealand dollar-denominated debt instrument.

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 dollar 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 return on maturity 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 in 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 from its investment in financial arrangements;
  7. may make distributions to the unit holders on a regular basis, but does not guarantee 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.

Interpretation

In this determination, unless the context otherwise requires -

"Associated" mean associated persons under sections OD 7 and OD 8 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 LF 2(3) of the Act;

"Non-participating redeemable share" means a non-participating redeemable share under section CD 14(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 a recognised exchange under section OB 1 of the Act;

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

"Slice rule" means the slice rule under section CD 15(3) of the Act;

"The Act" means the Income Tax Act 2004.

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.

Application date

This determination applies for the 2007-08 and subsequent income years.

Dated at Wellington this 22nd day of January 2008

David Carrigan
Policy Manager
Inland Revenue