FDR 2016/03
Issued
23 May 2016

A type of attributing interest in a foreign investment fund for which a person may use the fair dividend rate

FDR 2016/03 covers a type of attributing interest in a foreign investment fund for which a person may use the fair dividend rate (Man AHL Pure Momentum 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)

Class A shares in Man AHL Pure Momentum Limited ("AHL Limited"), to which this determination applies, are attributing interests in a foreign investment fund ("FIF") for New Zealand resident investors.

The investments held by AHL Limited may consist predominantly of financial arrangements. In addition, some resident investors may hedge their attributing interests in AHL Limited 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.

AHL Limited is a leveraged product and "the Investment Manager will seek to provide an initial target exposure of 300% of the Net Asset Value" and "the investment exposure may be increased or decreased from time to time". Leverage may arise from the use of derivatives and/or borrowing by the company or the underlying funds in which it invests.

Notwithstanding that AHL Limited may have 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 AHL Limited.

Scope of determination

This determination applies to Class A shares held by New Zealand resident investors in AHL Limited.

AHL Limited:

  • is a Cayman Islands exempted company operating as an open-ended investment fund registered under the Companies Law of the Cayman Island (2013 Revision)
  • issues shares that are not denominated in New Zealand dollars
  • employs a systematic momentum strategy through investment in derivative instruments and equity or debt securities (using a high degree of leverage), to provide exposure to a range of global equity, bond, currency and commodity markets, and
  • may also hold exchange traded funds and other funds.

New Zealand resident investors may hedge their attributing interests in AHL Limited back to New Zealand dollars.

It is a condition of this determination that the investment in AHL Limited 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.

It is an additional condition of this determination that the FDR method will apply unless the absolute value of AHL Limited’s actual notional derivative exposure is 25% or less of its Net Asset Value for a continuous period of 45 days. Should this occur, the determination ceases to apply from the first day of the quarter immediately following the expiry of the 45 day period.

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

"AHL Limited" means Man AHL Pure Momentum Limited, which is a Cayman Island exempted company operating as an open-ended investment fund registered under the Companies Law of the Cayman Island (2013 Revision).

Determination

This determination applies to an attributing interest in a FIF, being a direct income interest in AHL Limited.  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 does not apply for the 2016 income year for an investor in Class A shares in Man AHL Pure Momentum Limited unless that investor chooses that determination to apply for that income year.

Dated this 23rd day of May 2016.

John Trezise
Investigations Manager, Investigations & Advice
Inland Revenue