Use of fair dividend rate method for a type of attributing interest in a foreign investment fund

Reference

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 True Partners Fund are attributing interests in a foreign investment fund (FIF).

The investments held by the True Partners 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 True Partners Fund having assets predominantly comprising financial arrangements and the potential for New Zealand investors to effectively hedge their investments in the True Partners Fund to New Zealand dollar values, 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 True Partners Fund.

Scope of determination

This determination applies to shares held in the True Partners Fund.

The True Partners Fund:

• is organised under the laws of the Cayman Islands as a limited liability company
• invests primarily in derivatives.

This determination is made subject to the following conditions:

1. The investment in the True Partners 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. As it is an actively managed fund, the True Partners Fund may temporarily close out its derivative investments. This may result in the True Partners Fund having a notional derivative position of less than 20% of its net asset value. Should this reduction in the value of derivative exposure occur, it is expected that the level of net asset value of at least 20% 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 True Partners 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 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:

"True Partners Fund" means the True Partners 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 Act 2007

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

Determination

This determination applies to an attributing interest in a FIF, being a direct income interest in the True Partners Fund. This is a type of attributing interest for which an 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 Act, this determination also applies for an income year beginning before the date of this determination for a person who invests in the True Partners Fund and who chooses that the determination applies for that income year.

Dated this 19th day of September 2016.

Graham Poppelwell
Investigations Manager
Inland Revenue