FDR 2014/02
Issued
11 Mar 2014

Use of fair dividend rate method for a type of attributing interest in a foreign investment fund

FDR 2014/02 covers the use of the fair dividend rate method for a type of attributing interest in a FIF (Civic Capital Currency Offshore Fund Limited).

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

The investments held by the Civic Capital Fund through the Civic Capital Currency Master Fund Limited (the Civic Master Fund) are predominantly financial arrangements. In addition, the NZFM Funds hedge their attributing interests in the Civic Capital 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 Civic Capital Fund having assets predominantly comprising financial arrangements and the presence of the hedging arrangement, the overall arrangement 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 its attributing interest in the Civic Capital Fund.

Scope of determination

This determination applies to shares held by the NZFM Funds in the Civic Capital Fund and Civic Capital Fund's investment in the Civic Master Fund.

The Civic Capital Fund:

  • is organised under the laws of the Cayman Islands as a limited liability company;
  • issues shares, denominated in USD, to the NZFM Funds;
  • Invests in and trades in global currency markets and foreign exchange related derivatives through its investment in the Civic Master Fund.

The NZFM Funds will hedge their attributing interests in the Civic Capital Fund back to New Zealand Dollars.

It is an additional condition of this determination that the investment in the Civic Capital Fund is not part of an overall arrangement that seeks to provide 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:

"Civic Capital Fund" means the issuer, Civic Capital Currency Offshore Fund Limited, which is incorporated as a company under the laws of the Cayman Islands;

"Civic Capital Currency Master Fund Limited" means the master fund used for holding the investments, which is incorporated as a company under the laws of the Cayman Island;

"Fair dividend rate method" means the fair dividend method under section YA 1 of the Income Tax Act 2007.

"Financial arrangement" means financial arrangement under section EW 3 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 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 Civic Capital 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 2014 and subsequent income years.

However, under section 91AAO(3B) of the Tax Administration Act 1994, this determination does not apply for the 2014 income year for an investor in the Civic Capital Fund unless that investor chooses for this determination to apply for that year.

Dated at Christchurch on 11th day of March 2014

 

John Trezise
Investigations Manager, Investigations and Advice
Inland Revenue