Use of fair dividend rate method for a type of attributing interest in a foreign investment fund (Macquarie Highpoint Trust)

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. In addition, the existence of lock in thresholds may mean that section EX 40(9)(e) of the Act applies. Accordingly, 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 and the presence of lock in thresholds which potentially provide a guaranteed type return, I consider it is appropriate that New Zealand resident investors in this arrangement may 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 or one that effectively provides guaranteed returns.

Scope of determination

The investments to which this determination applies are units in a non-resident issuer which:

1. is the Macquarie Highpoint Trust, a unit trust that is established and tax resident in Australia;
2. is managed by Macquarie Investment Services Limited (Macquarie), a company incorporated and tax resident in Australia, or an entity which is associated with Macquarie;
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 the movement in selected indices relating to shares listed on a recognised exchange;
5. may make distributions to the unit holders, but investors are not guaranteed that any income will be derived or that a distribution will be made;
6. may provide investors with an amount exceeding the issue price of the unit on redemption, but at the time the unit is first issued the redemption price of a unit is not guaranteed to exceed its issue price.

Interpretation

In this determination, unless the context otherwise requires -

"Associated" means 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 recognised exchange under section OB 1 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 26th day of March 2008.

David Carrigan
Policy Manager
Inland Revenue Department