Revocation of Determination FDR 2008/13

Reference

This determination is made under section 91AAO of the Tax Administration Act 1994.

This power has been delegated by the Commissioner of Inland Revenue to the position of Policy Manager, Inland Revenue under section 7 of the Tax Administration Act 1994.

Discussion (which does not form part of the determination)

Units in the non-resident issuer (PIMCO Cayman Global Bond (NZD Hedged) Fund) to which this determination applies held by New Zealand-resident investors, including Tower Asset Management International Bond Fund, are an attributing interest in a foreign investment fund.

New Zealand-resident investors are required to apply the foreign investment fund 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 and due to the presence of hedging arrangements that would be highly effective in terms of hedging the underlying foreign currency financial arrangements, section EX 46(10)(c) of the Act would apply to units in the non-resident issuer to prevent the use of the fair dividend rate (FDR) method in the absence of a determination made under section 91AAO of the Tax Administration Act 1994.

An attributing interest in a foreign investment fund to which this determination applies is the subject of an earlier determination, Determination FDR 2008/13 allowing the use of the FDR method for the interest. Section 91AAO(4) authorises the making of a determination that revokes an earlier determination. This determination revokes Determination FDR 2008/13. The application date varies according to when the attributing interests in the nonresident issuer were acquired.

The determination made in FDR 2008/13 relied on the application of a trading criterion that meant that an actively traded debt portfolio, which met certain criteria, was determined to be more akin to equity than debt. Therefore, despite the non-resident issuer having financial arrangements that were 80% or more by value effectively hedged to New Zealand dollars, its actively traded debt portfolio made it appropriate for the FDR method to be used. However, this criterion is no longer considered appropriate because it creates compliance and administrative concerns, and has now been removed. It is therefore appropriate to revoke Determination FDR 2008/13.

Scope of determination

This determination applies to units held by New Zealandresident investors, including Tower, a portfolio investment entity, in a non-resident issuer.

1. The non-resident issuer:
   1. is a unit trust that is established in the Cayman Islands as a series trust of PIMCO Cayman Trust;
   2. is known as the PIMCO Cayman Global Bond (NZD-Hedged) Fund;
   3. issues New Zealand dollar denominated units (not being fixed rate shares, non-participating redeemable shares or guaranteed return shares) directly to the New Zealand investors;
   4. invests in a global bond portfolio using a trading strategy based on the benchmark index;
   5. actively manages the global bond portfolio;
   6. has a minimum turnover percentage target;
   7. seeks to hedge 95% to 105% of the value of the global bond portfolio to the New Zealand dollar;
   8. is managed against a global currency index and is permitted to have currency exposure to plus or minus 25% of the Fund's benchmark index on a per currency basis and is permitted to purchase currencies not represented in the index;
   9. has a target tracking error measured against the benchmark index.
2. Tower will exercise no control or influence over the investment decisions of the non-resident issuer including the target minimum annual turnover percentage, asset allocation decisions and the target tracking error.

Interpretation

In this determination unless the context otherwise requires:

"Benchmark date" means 8 March 2010;

"Benchmark index" means the index that at the date of this determination is called the Lehman Brothers Global Aggregate Bond Index, or a replacement index with substantially the same features;

"Compensation" means an amount paid by Tower for fee rebates or administrative errors in relation to units in Tower;

"Compensation units" are units in Tower that are:

• held by a unit holder on or before the benchmark date; or
• held by a unit holder after the benchmark date, if the units are acquired as a result of compensation in relation to other compensation units;

"PIMCO Cayman Trust" means a unit trust established in Cayman Islands pursuant to a declaration of trust;

"Series trust" means a separate and distinct unit trust established in the Cayman Islands as a series trust of PIMCO Cayman Trust;

"Fixed rate share" means a fixed rate share under section LL 9 of the Act;

"Non-participating redeemable share" means a nonparticipating share under section CD 22 of the Act;

"Guaranteed return share" means a share involving an obligation under section EX 46(10)(d) of the Act;

"The Act" means the Income Tax Act 2007;

"Tower" means Tower Asset Management International Bond Fund;

"Minimum turnover percentage target" means the target percentage agreed with and disclosed for Determination FDR 2008/13 to the Policy Manager, Inland Revenue who made that determination;

"Target tracking error" means the target percentage agreed with and disclosed for Determination FDR 2008/13 to the Policy Manager, Inland Revenue who made that determination.

Determination

Determination FDR 2008/13 is revoked.

Application date

This determination applies as follows:

1. For the 2015/16 and subsequent income years for:
   1. units in the non-resident issuer acquired on or before the earlier of 31 March 2010 or the time that the number of units on issue is 5 percent more than the greatest number of units on issue on the benchmark date; and
   2. units in the non-resident issuer acquired after the benchmark date, if the units are acquired as a result of compensation in relation to compensation units.
2. For the 2010/11 and subsequent income years for all other units in the non-resident issuer.

Dated at Wellington this 29th day of March 2010.

Peter Frawley
Policy Manager