FDR 2014/03
Issued
15 Dec 2014

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

FDR 2014/03 covers the use of the fair dividend rate method for a type of attributing interest in a FIF (Harness Macro Currency Fund).

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 Harness Macro Currency Fund (the Harness 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 Harness Fund, a sub-fund of CitiFirst Investments plc, are predominantly financial arrangements. In addition, the NZFM Funds hedge their attributing interests in the Harness 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 the Harness 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 Harness Fund.

Scope of determination

This determination applies to shares held by the NZFM Funds in the Harness Fund, a sub-fund of CitiFirst Investments plc.

CitiFirst Investments plc:

  • is organised under the laws of Ireland as a limited liability company;
  • is authorised by the Central Bank of Ireland;
  • is an umbrella, open-ended investment company;
  • has variable capital;
  • invests in and trades in global currency markets and foreign exchange related derivatives through a total return swap with Citi bank Global Markets Limited.

The Harness Fund is a sub-fund of CitiFirst Investments plc and indirectly invests in trades in global currency markets and foreign exchange related derivatives, primarily through a total return swap.

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

This determination is made subject to the following conditions:

  1. That the investment in the Harness 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.
  1. That the total value of exposures to foreign exchange related derivatives through a total return swap with Citibank Global Markets Limited will be more than 20% of the total asset value of the Harness Macro Currency Fund. If an event occurs that the 20% test is not met, and it is not corrected in 45 days, then this determination ceases to apply from the first day of the following Quarter.
  1. That the Harness Macro Currency Strategy continuously trades in foreign exchange and foreign exchange related derivative financial instruments. If an event occurs and the requirement is not met for a continuous period of 45 days, then this determination ceases to apply from the first day of the following Quarter.

Interpretation

In this determination unless the context otherwise requires:

"Harness Fund" means the Harness Macro Currency Fund, which is a sub-fund of the issuer CitiFirst Investments plc;

"CitiFirst Investments plc" means the legal entity used for holding the investments, which is incorporated as a company under the laws of Ireland;

"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;

"Quarter" has the meaning contained in section YA 1 of the Income Tax Act 2007;

"The NZFM Funds" means a trust managed by New Zealand Funds Management Limited.

Determination

This determination applies to an attributing interest in a FIF, being a direct income interest in the Harness 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 2015 and subsequent income years.

However, under section 91AAO(3B) of the Tax Administration Act 1994, this determination does not apply for the 2015 income year for an investor in the Harness Fund unless that investor chooses for this determination to apply for that year.

Dated at Christchurch on 15 day of December 2014.

 

John Trezise
Investigations Manager, Investigations and Advice
Inland Revenue