FDR 2009/01
Issued
08 May 2009

A type of attributing interest in a foreign investment fund for which a person may not use the fair dividend rate method (AMP future directions international bond fund)

FDR 2009/01 covers attributing interest in a FIF for which a person may not use the fair dividend rate method (AMP future directions international bond fund).

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 Policy Manager, Policy Advice Division, under section 7 of the Tax Administration Act 1994.

Discussion (which does not form part of the determination)

Units in the non-resident issuer to which this determination applies (the AMP Future Directions International Bond Fund-; "the Fund") 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.

The Fund invests predominantly in financial arrangements (at least 80% of the investment mix) comprising government, government-guaranteed and high-grade corporate bonds and securities in countries around the world. Up to 20% of the Fund may be invested in other asset classes (such as shares) with the objective of seeking opportunities to benefit from any above market performance generated by the underlying investment managers in such other asset classes. Consequently, the Fund will use derivatives to offset the exposure to such other asset classes, other than the exposure to the under or over performance of the underlying investment managers. The Fund is available either hedged to Australian dollars or unhedged.

The AMP Capital Hedged Global Fixed Interest Fund ("the AIF Q Fund"), which is resident in New Zealand, invests in the unhedged Fund and aims to be fully hedged to the New Zealand dollar by entering into appropriate currency hedge positions, which are financial arrangements separate from the units that the AIF Q Fund holds in the Fund.

Because the Fund does not have New Zealand dollar hedging arrangements and the AIF Q Fund enters into its own New Zealand dollar hedging arrangements, section EX 40(9)(d) of the Income Tax Act 2004 (taking into account the amendments made to that provision by the Taxation (Business Taxation and Remedial Matters) Act 2007) and section EX 46(10)(c) of the Income Tax Act 2007 do not exclude the AIF Q Fund from using the fair dividend rate ("FDR") method to determine its tax liability in respect of the units it holds in the Fund under the FIF rules.

However, the AIF Q Fund's hedging strategy ensures that its investment in the Fund is economically equivalent to a loan denominated in New Zealand dollars.

The policy intention is that the AIF Q Fund's investment in the Fund should not qualify for the FDR method as the AIF Q Fund's investment is akin to a New Zealand dollar denominated debt investment having regard to the nature of the Fund's investments and the AIF Q Fund's hedging position. However, in the absence of this determination, the AIF Q Fund could choose to use the FDR method for the 2007-2008 and subsequent income years. This result is inconsistent with the policy intention of the FIF rules.

I consider that it is appropriate for the AIF Q Fund to be excluded from using the FDR method in respect of its investment in the Fund for the 2007-08 and subsequent income years. The overall arrangement (as described to me by the applicant) consists predominantly of investments in debt securities and is sufficiently hedged so that it is akin to a New Zealand dollar denominated debt investment. Accordingly, it is appropriate that the FDR method not be used by the AIF Q Fund or other similarly hedged New Zealand resident investors in respect of investments in the Fund.

Scope of determination

The investments that this determination applies are units in the unhedged AMP Future Directions International Bond Fund, a unit trust established in Australia ("the Fund").

The Fund:

  • is resident in Australia for tax purposes;
  • invests predominantly (80% or more of total net assets) in fixed interest securities in countries around the world, including government and government-guaranteed securities, corporate securities, asset-backed securities and hybrid securities (such as convertible notes);
  • can invest in other asset classes (such as shares) but the net exposure (including any derivatives used to offset the market exposure, that is, the exposure other than the under or over performance of the underlying investment managers) to such asset classes shall not exceed 5% of the value of the Fund;
  • has a tracking error measured against a performance benchmark of the Barclays Capital Global Aggregate Index.

Interpretation

In this determination:

"Financial arrangement" means financial arrangement under section EW 3 of the Act;

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

"The Act" means the Income Tax Act 2004 or the Income Tax Act 2007, as applicable;

"Target tracking error" means the Fund's target tracking error agreed with and disclosed, prior to this determination, to the Policy Manager, Inland Revenue who makes this determination.

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 attributing interest, if the person fully hedges (on a pre-tax basis, plus or minus 10%) the interest back to the New Zealand dollar.

Application date

This determination applies for the 2007-2008 and subsequent income years. However, under section 91AAO(3B) of the Tax Administration Act 1994, this determination does not apply for an income year beginning before the date of this determination for an investor in the Fund unless that investor chooses for this determination to apply for that year. 

Dated at Wellington this 8th day of May 2009.

David Carrigan
Policy Manager, Inland Revenue