A type of attributing interest in a foreign investment fund for which a person may not use the fair dividend rate method (BlackRock Global Funds World Bond Fund)

Reference

This determination is made under section 91AAO(1)(b) 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 BlackRock Global Funds (BGF), a public limited company established under the laws of Luxembourg to which this determination applies, are an attributing interest in a foreign investment fund (FIF) for New Zealand resident investors. BGF is structured as an umbrella fund with segregated liability between sub-funds. Those sub-funds, whilst economically separate, do not have a separate legal personality.

New Zealand resident investors are required to apply the FIF rules to determine their tax liability in respect of their investment in shares in BGF each year.

The BGF World Bond Fund (the Fund) is a sub-fund of BGF which invests in a portfolio of global fixed interest securities and other financial arrangements. The Fund has on issue a number of share classes including a class of shares denominated in New Zealand dollars (the NZD share class) that provides holders of that class of shares with an interest in the pool of investments held by the Fund. Foreign currency hedging arrangements are in place, which effectively provide investors with a New Zealand dollar denominated return on the financial arrangements held by the Fund.

Section EX 46(10)(c) of the Income Tax Act 2007 would not apply to prevent the use of the fair dividend rate (FDR) method, but would apply if the Fund represented a separate foreign company and the NZD share class was the only class of shares on issue.

The policy intention is that the FDR method of calculating FIF income should not be applied to investments that provide a New Zealand resident investor with a return similar to a New Zealand dollar denominated debt investment. It is appropriate for the Commissioner to take into account the whole of the arrangement, including any interposed entities or financial arrangements, in ascertaining whether an investment in a FIF provides the New Zealand-resident investor with a return akin to a New Zealand dollar denominated debt investment.

On this basis, where a New Zealand resident invests in NZD share class issued in the Fund, I consider that it is appropriate for the investor holding that investment to be excluded from using the FDR method for the 2016-17 and subsequent income years.

Scope of determination

This determination is issued on the basis of information provided to the Commissioner before the date of this determination and applies to an attributing interest in a FIF held by New Zealand resident investors in a non-resident issuer where:

1. The non-resident issuer:
   1. is incorporated in Luxembourg, established on 14 June 1962, and issues multiple classes of shares;
   2. is known at the date of this determination as BlackRock Global Funds; and
   3. is structured as an umbrella fund with segregated liability between sub-funds; and
2. The attributing interest consists of a New Zealand dollar denominated class of share issued in the BlackRock Global Funds World Bond Fund, a sub-fund of BlackRock Global Funds which provides exposure solely to a sub-fund that invests in a portfolio predominantly of fixed interest securities and other financial arrangements; and
3. The investment assets attributable to the New Zealand dollar denominated class of share are subject to foreign currency hedging arrangements undertaken by the non-resident for the purpose of eliminating any exchange rate risk for New Zealand investors.
4. The hedging mandate for the NZD investments is to be in the range of 99.5 -100.5%.

Conditions stipulated

This determination is issued on the condition that the hedging mandate does not change to fall outside the 80% - 125% range, being the hedging range required by NZIAS 39 for a hedging instrument to be highly effective under section EX 46(10)(b).

Interpretation

In this determination unless the context otherwise requires:

"The Act" means the Income Tax Act 2007;

"Financial arrangement" means financial arrangement under section EW 3 of the Act; and

"Non-resident" means a person that is not resident in New Zealand for the purposes of the Act.

Determination

An attributing interest in a FIF to which this determination applies is a type of attributing interest for which a person may not use the FDR method to calculate FIF income from the interest.

Application Date

This determination applies for the 2016-2017 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 New Zealand denominated class of share issued in the BlackRock Global Funds World Bond Fund and who chooses that this determination applies for that income year.

Dated this 11th day of July 2016.

Graham Poppelwell
Investigations Manager
Inland Revenue