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 class shares)

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 Technical Specialist, 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 Global High Yield Fund (“GHY Fund”) is a sub-fund of RIC which invests in a portfolio of corporate debt instruments. RIC issues a class of shares denominated in New Zealand dollars (“NZDH-A shares”) that provide holders of that class of shares with an interest in the pool of investments held by the GHY Fund. RIC undertakes hedging for NZDH-A shares, with the intention that this arrangement ensures 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 does not apply to prevent the use of the fair dividend rate (“FDR”) method, but would apply if the GHY Fund represented a separate foreign company and the NZDH-A share class was the only class of shares on issue.

On this basis, where a New Zealand resident invests in NZDH-A shares issued by RIC and the share class, which has a value in New Zealand dollars, is linked to an interest in the GHY Fund that invests predominantly in corporate debt instruments that are highly effectively hedged against foreign currency movements, I consider that it is appropriate for investors holding those interests in RIC to be excluded from using the FDR method for the 2019 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; and
  • 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, issued by that non-resident that provides exposure solely to the GHY Fund that predominantly (i.e. 80% or more by value at a time in the income year) holds corporate debt instruments; and
• The investment assets attributable to NZDH-A shares are subject to foreign currency hedging arrangements undertaken by the non-resident for the purpose of eliminating exchange rate risk for New Zealand investors on a highly effective basis.

Interpretation

In this determination unless the context otherwise requires:

“Fair dividend rate method” means the fair dividend rate method under section EX 44 of the Income Tax Act 2007; and

“Foreign investment fund” means foreign investment fund under section YA 1 of the Income Tax Act 2007; and

“Non-resident” means a person that is not resident in New Zealand for the purposes of the Income Tax Act 2007.

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 2019 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 NZDH-A class of shares in the GHY Fund and who chooses that the determination applies for that income year.

Dated this 11th day of May 2018.

Haydn Clark

Technical Specialist