FDR 2015/03
Issued
18 Sep 2015

Use of fair dividend rate method for a type of attributing interest in a foreign investment fund (GMO Systematic Global Macro Trust)

FDR 2015/03 covers the use of fair dividend rate method for a type of attributing interest in a FIF (GMO Systematic Global Macro Trust).

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)

Class A and B units in the GMO Systematic Global Macro Trust ("GMO Trust"), to which this determination applies, are attributing interests in a foreign investment fund ("FIF") for New Zealand resident investors.

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

Despite the GMO Trust having assets predominantly comprising financial arrangements and the presence of the hedging 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 resident investors to use the fair dividend rate method to calculate FIF income from its attributing interest in the GMO Trust.

Scope of determination

This determination applies to both Class A and Class B units held by New Zealand resident investors in the GMO Trust.

The GMO Trust:

  • is an Australian registered managed investment scheme;
  • issues units, denominated in AUD;
  • invests in a range of global equity, bond, currency and commodity markets with its normal investment strategy being to trade exchange traded futures, forward foreign exchange contracts, swaps, options and other derivatives using a high degree of leverage; and
  • may also hold exchange traded funds and other funds.

New Zealand resident investors may hedge their attributing interests in the GMO Trust back to New Zealand dollars.

It is an additional condition of this determination that the investment in the GMO Trust is not part of an overall arrangement that seeks to provide the New Zealand resident investor with a return that is equivalent to an effective New Zealand dollar denominated interest exposure.

Interpretation

In this determination unless the context otherwise requires:

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

"Foreign investment fund" means foreign investment fund 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;

"GMO Trust" means the GMO Systematic Global Macro Trust, which is an Australian registered managed investment scheme.

Determination

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

Application Date

This determination applies for the 2017 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 a person who invests in the GMO Trust and who chooses that the determination applies for that income year.

Dated at Hamilton this 18th day of September 2015.

Graham Poppelwell
Investigations Manager, Investigations and Advice
Inland Revenue