A type of attributing interest in a foreign investment fund for which a person may not use the fair dividend rate method (Russell Investment Company plc: NZDH-A-DURH class shares)
FDR 2017/01 covers a type of attributing interest in a FIF for which a person may not use the fair dividend rate method (Russell Investment Co plc).
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 the Russell Investment Company plc (RIC), an Irish public limited company to which this determination applies, are an attributing interest in a foreign investment fund (FIF) for New Zealand resident investors. RIC is structured as an umbrella fund with segregated liability between sub-funds. Those sub-funds do not have a separate legal personality under Irish law.
New Zealand resident investors are required to apply the FIF rules to determine their tax liability in respect of their investment in shares in RIC each year.
The Russell Global Bond Fund (RGBF) is a sub-fund of RIC which invests in a portfolio of transferable debt instruments. RIC issues a class of shares denominated in New Zealand dollars (NZDH-A-DURH shares) that provide holders of that class of shares with an interest in the pool of investments held by the RGBF. RIC undertakes hedging for NZDH-A-DURH shares, with the intention that this arrangement ensures that the New Zealand dollar value of that class of shares is unaffected by foreign exchange movements.
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 RGBF represented a separate foreign company and the NZDH-A-DURH 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 NZDH-A-DURH shares issued by RIC and the share class, which has a value in New Zealand dollars, is linked to an interest in a pool of debt securities held by RGBF and effectively hedged against foreign currency movements by RIC, I consider that it is appropriate for those holdings in RIC to be excluded from using the FDR method for the 2017 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:
- The non-resident issuer:
- is an Irish public limited company established on 31 March 1994 that issues multiple classes of shares;
- is known at the date of this determination as Russell Investment Company plc; and
- is structured as an umbrella fund with segregated liability between sub-funds; and
- The attributing interest consists of a New Zealand dollar denominated class of shares, NZDH-A-DURH, issued by that non-resident that provides exposure solely to a sub-fund that predominantly (i.e. 80% or more by value at a time in the income year) holds transferrable debt instruments and
- The investment assets attributable to NZDH-A-DURH shares 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.
In this determination unless the context otherwise requires:
“Financial arrangement” means financial arrangement under section EW 3 of the Act;
“Non-resident” means a person that is not resident in New Zealand for the purposes of the Act; and
“The Act” means the Income Tax Act 2007.
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.
This determination applies for the 2017 income year 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 NZDH-A-DURH shares in RIC and who chooses that this determination applies for that income year.
Dated this 17 day of March 2017.