Use of fair dividend rate method for a type of attributing interest in a foreign investment fund.
FDR 2016/02 covers the use of the fair dividend rate method for a type of attributing interest in a FIF (Astenbeck Offshore Commodity Fund II Limited).
This determination is made under section 91AAO(1)(a) of the Tax Administration Act 1994 (the Act). 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 Act.
Discussion (which does not form part of the determination)
Shares in the Astenbeck Offshore Commodity Fund II Limited (Astenbeck Feeder Fund), to which this determination applies, are attributing interests in a foreign investment fund ("FIF") for New Zealand resident investors.
The investments held indirectly by Astenbeck Feeder Fund are predominantly financial arrangements. In addition, some resident investors may hedge their attributing interests in Astenbeck Feeder Fund back to New Zealand dollars. Therefore, section EX 46(10)(cb) of the Income Tax Act 2007 (ITA) could apply to prevent the investors from using the fair dividend rate method in the absence of a determination under section 91AAO of the Act.
Despite Astenbeck Feeder Fund 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 their attributing interest in Astenbeck Feeder Fund.
Scope of determination
This determination applies to investments in Astenbeck Feeder Fund held by New Zealand resident investors.
Astenbeck Feeder Fund:
- is a Cayman Islands exempted, umbrella open-ended investment company, with variable capital
- invests all of its investible assets in Astenbeck Master Commodities Fund II Limited (Master Fund)
- issued/issues shares, denominated in US dollars
- through its investment in the Master Fund, invests primarily in commodities (which may include commodity futures contracts, forward contracts, swaps and options on the foregoing, collectively referred to as 'commodities'), commodity-related securities, including exchange traded funds and currencies, with an investment objective of achieving superior absolute returns
New Zealand resident investors may hedge their attributing interests in Astenbeck Feeder Fund back to New Zealand dollars.
This determination is made subject to the following conditions:
- The investment in Astenbeck Feeder Fund is not part of an overall arrangement that seeks to provide investors a return that is equivalent to an effective New Zealand dollar denominated interest exposure.
- As the Master Fund is an actively managed fund, it may temporary close out its derivative investments. This may result in the Astenbeck Feeder Fund having a notional derivative position of less than 20% of its net assets value. Should this reduction in the value of derivative 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.
- If the Master Fund ceases to trade continuously in derivative 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 within a continuous period of 45 days.
In this determination unless the context otherwise requires:
"Fair dividend rate method" means fair dividend method under section YA 1 of the ITA
"Foreign investment fund" means foreign investment fund under section YA 1 of the ITA
"Financial arrangement" means financial arrangement under section EW 3 of the ITA
"Astenbeck Feeder Fund" means the Astenbeck Offshore Commodity Fund II Limited, which is a Cayman Islands exempted company.
This determination applies to an attributing interest in a FIF, being a direct income interest in the Astenbeck Feeder Fund. 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.
This determination applies for the 2017 and subsequent income years.
However, under section 91AAO(3B) of the Act, this determination also applies for an income year beginning before the date of this determination for a person who invests in the Astenbeck Feeder Fund and who chooses that the determination applies for that income year.
Dated at Hamilton this 21st day of March 2016.
Investigations Manager, Investigations and Advice