A type of attributing interest in a foreign investment fund for which a person may use the fair dividend rate method

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 Investigations Manager, Investigations and Advice, under section 7 of the Tax Administration Act 1994.

Discussion (which does not form part of the determination)

Shares in the Ospraie Commodity Fund Limited ("the Ospraie Fund"), to which this determination applies, are attributing interests in a foreign investment fund ("FIF") for certain portfolio investment entity ("PIE") funds ("the NZFM Funds") managed by New Zealand Funds Management Limited.

The investments held by the Ospraie Fund are predominantly financial arrangements. In addition, the NZFM Funds hedge their attributing interests in the Ospraie Fund back to New Zealand dollars. Therefore, section EX 46(10)(cb) of the Income Tax Act 2007 could apply to prevent the NZFM Funds from using the fair dividend rate method in the absence of a determination under section 91AAO of the Tax Administration Act 1994.

Despite this, the overall arrangement (as described by the applicant) contains sufficient risk so that it is not akin to a New Zealand dollar denominated debt instrument. Accordingly, I consider it is appropriate for the NZFM Funds to use the fair dividend rate method to calculate FIF income from an attributing interest in the Ospraie Fund.

Scope of determination

This determination applies to shares held by the NZFM Funds in the Ospraie Fund.

Shares in the Ospraie Fund are attributing interests in a FIF for the NZFM Funds.

The Ospraie Fund:

• is organised under the laws of the Cayman Islands as a limited liability company
• issues shares, denominated in US dollars, to the NZFM Funds
• invests in and trades in a global portfolio of commodities and commodity related derivative instruments, denominated in US dollars or effectively hedged to US dollars
• uses a trading strategy based on active leveraged trading of the commodities and related derivatives.

The NZFM Funds hedge their attributing interests in the Ospraie Fund back to New Zealand dollars.

It is an additional condition of this determination that the investment in the Ospraie Fund is not part of an overall arrangement that seeks to provide the NZFM Funds with a return that is equivalent to an effective New Zealand dollar denominated interest exposure.

Interpretation

In this determination unless the context otherwise requires:

• "Ospraie Fund" means the issuer, Ospraie Commodity Fund Limited, which is incorporated as a company under the laws of the Cayman Islands
• "Fair dividend rate method" means the fair dividend rate method under section YA1 of the Income Tax Act 2007
• "Financial arrangement" means financial arrangement under section EW3 of the Income Tax Act 2007
• "Foreign investment fund" means foreign investment fund under section YA 1 of the Income Tax Act 2007
• "The NZFM Funds" means a unit trust organised under the laws of New Zealand and is a portfolio investment entity, managed by New Zealand Funds Management Limited
• "Portfolio investment entity" means a portfolio investment entity under section YA 1 of the Income Tax Act 2007.

Determination

This determination applies to an attributing interest in a FIF, being a direct income interest in the Ospraie Fund. This is a type of attributing interest for which the NZFM Funds may use the fair dividend rate method to calculate FIF income from the interest.

Application date

This determination applies for the 2012-13 and subsequent income years.

Dated at Christchurch this 27th day of March 2013.

John Trezise
Investigations Manager, Investigations and Advice
Inland Revenue