FDR 2009/02
Issued
11 May 2009

A type of attributing interest in a foreign investment fund for which a person may not use the fair dividend rate method (PIMCO Wholesale Global Bond Fund)

FDR 2009/02 covers a type of attributing interest in a FIF for which a person may not use the fair dividend rate method (PIMCO Wholesale Global 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 EQT PIMCO Wholesale Global Bond Fund (PIMCO) 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 investment in units in PIMCO each year.

PIMCO invests in global fixed interest securities for which PIMCO has made foreign currency hedging arrangements to provide investors with an Australian dollar denominated return on these debt instruments. Section EX 46(10)(c) of the Income Tax Act 2007 ("the Act") would apply to prevent the use of the fair dividend rate (FDR) method if the foreign currency hedging arrangements were made to provide a New Zealand dollar denominated return on these financial arrangements.

Instead of PIMCO undertaking New Zealand dollar currency hedging arrangements New Zealand resident investors can enter into separate foreign currency hedging arrangements to provide a New Zealand dollar equivalent return when the two arrangements, being the investment in PIMCO and the currency hedge, are considered as a single arrangement.

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 New Zealand dollar denominated debt investment.

On this basis where the New Zealand resident investor undertakes New Zealand dollar currency hedging arrangements to at least 80% of the value of their interest in PIMCO, I consider that it is appropriate for the investment in PIMCO to be excluded from using the FDR method for the 2008-2009 and subsequent income years.

Scope of determination

This determination 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:
    1. is an Australian unit trust established on 31 July 1998;
    2. is known as the EQT PIMCO Wholesale Global Bond Fund;
    3. issues units denominated in Australian dollars;
    4. invests predominately in investment grade global fixed interest securities;
    5. enters into foreign currency hedging arrangements to provide a return similar to Australian dollar denominated debt instruments;
  2. In respect of the EQT PIMCO Wholesale Global Bond Fund:
    1. the volatility risk level of the non-resident issuer is represented to investors as low to medium;
    2. the average tracking error of the non-resident issuer as measured against the benchmark index is below the level agreed with and disclosed before this determination is made to the Policy Manager, Inland Revenue who makes this determination;
    3. the non-resident issuer does not adopt a target tracking error above the target percentage agreed with and disclosed before this determination is made to the Policy Manager, Inland Revenue who makes this determination; and
  3. The New Zealand resident investor undertakes New Zealand dollar currency hedging arrangements to at least 80% of the value of their interest in the nonresident issuer.

Interpretation

In this determination unless the context otherwise requires:

"Benchmark Index" means the Lehman Brothers Global Aggregate Bond Index hedged to the Australian dollar, or a replacement index with substantially the same features;

"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 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 fair dividend rate method to calculate FIF income from the interest.

Application date

This determination applies for the 2008-2009 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 PIMCO unless that investor chooses for this determination to apply for that year.

Dated at Wellington this 11th day of May 2009.

David Carrigan
Policy Manager, Inland Revenue