FDR 2015/02
Issued
21 Sep 2015

Use of fair dividend rate method for a type of attributing interest in a foreign investment fund in the Harness Macro Currency Fund.

FDR 2015/02 covers the use of fair dividend rate method for a type of attributing interest in a foreign investment fund (Harness Macro Currency Fund).

This determination does not apply to the Harness Macro Currency Fund which was a sub-fund of CitiFirst Investments PLC (FDR 2014/03).

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).

The investments held by the Harness Fund, a sub-fund of the Harness Investment Fund, are predominantly financial arrangements. Therefore, section EX 46(10)(cb) of the Income Tax Act 2007 could apply to prevent the investor 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, 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 an investor 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 in the Harness Fund, a sub-fund of the Harness Investment Fund.

Harness Investment Fund:

  • is organised under the laws of Luxembourg as a limited liability company;
  • is authorised in Luxembourg as a UCITS (Undertaking for Collective Investment in Transferable Securities);
  • is an umbrella, open-ended investment company;
  • has variable capital;
  • invests in and trades in global currency markets and foreign exchange related derivatives.

The Harness Fund is a sub-fund of the Harness Investment Fund and directly invests in trades in global currency markets and foreign exchange related derivatives.

This determination is made subject to the following conditions:

  1. The investment in the Harness Fund is not part of an overall arrangement that seeks to provide the investor with a return that is equivalent to an effective New Zealand dollar denominated interest exposure.
  2. To mitigate the volatility of the liquid investments, the Harness Fund has a risk management process whereby if the fund experiences a 7.5% decline in a month or experiences a 10% decline in a rolling 12-month period, then the total value foreign currency exposure in the Harness Fund will be reduced to 20% of its net asset value. Should this reduction in the value of foreign currency exposure occur, it is expected that the normal level of this type of investment would be restored within 45 days. Failure to restore the investment to its normal levels would result in this determination ceasing to apply from the first day of the following Quarter.
  3. If the Harness Fund ceases to trade continuously in foreign exchange and foreign exchange related derivative financial instruments or there is a reduction of investment holdings in favour of an investment that provides a New Zealand-resident investor with a return akin to a New Zealand dollar denominated debt investment, then this determination will cease to apply from the first day of the following Quarter unless corrective action is undertaken to increase the foreign currency exposure back to its previous level within a continuous period of 45 days.

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 the Harness Investment Fund;

"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 2007;

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

"The investor" means the person who has a share in the Harness Fund.

Determination

An attributing interest in a FIF to which this determination applies is a type of attributing interest for which a person may use the fair dividend rate method to calculate FIF income from the interest.

Application Date

This determination applies for the 2015-2016 and subsequent income years. However, under section 91AAO(3B) of the Tax Administration Act 1994, this determination also applies for an income year beginning before the date of this determination for an investor in the Harness Fund that chooses for this determination to apply for that year.

Dated this 21st day of September 2015.

John Trezise
Investigations Manager, Investigations and Advice
Inland Revenue