A type of attributing interest in a foreign investment fund for which a person may use the fair dividend rate method (Units in the Two Trees Global Macro Fund)

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 Technical Specialist, under section 7 of the Tax Administration Act 1994.

Discussion (which does not form part of the determination)

Units in the Two Trees Global Macro Fund ("Two Trees Fund"), to which this determination applies, are attributing interests in a foreign investment fund ("FIF") for New Zealand resident investors.

The investments held by the Two Trees Fund may consist predominantly of financial arrangements providing funds to a person. In addition, some investors may hedge their attributing interests in the Two Trees Fund back to New Zealand dollars. Therefore, section EX 46(10)(cb) of the Income Tax Act 2007 could apply to prevent those investors from using the fair dividend rate method in the absence of a determination under section 91AAO of the Tax Administration Act 1994.

Notwithstanding that the Two Trees Fund 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 their attributing interest in the Two Trees Fund.

Scope of determination

This determination applies to units held by New Zealand resident investors in the Two Trees Fund.

The Two Trees Fund achieves its investment objectives by taking long and short positions across global equity indices, bonds, commodities, currencies and volatility products, as well as making other investments. Exposure to these markets is primarily achieved through the use of exchange traded futures or over the counter derivatives such as currency forward contracts.

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

This determination is made subject to the following conditions:

1. The investment in the Two Trees Fund 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.
2. The absolute value of the Two Trees Fund's notional derivative exposure must not fall to 20% 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 following quarter.

Interpretation

In this determination unless the context otherwise requires:

“Fair dividend rate method” means the fair dividend rate 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; and

 "Two Trees Fund" means an Australian Unit Trust known at the date of this determination as the Two Trees Global Macro Fund.

Determination

This determination applies to an attributing interest in a FIF, being a direct income interest in the Two Trees Fund. 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 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 Two Trees Fund and who chooses that the determination applies for that income year.

Dated this 13th day of June 2018.

Haydn Clark
Technical Specialist