Use of fair dividend rate method for a type of attributing interest in a foreign investment fund (Russell Investments Multi Strategy Volatility 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)

Shares in the Russell Investments Multi Strategy Volatility Fund (“Russell MSV 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 Russell MSV Fund consist predominantly of financial arrangements providing funds to a person. In addition, some New Zealand resident investors hedge their attributing interests in the Russell MSV Fund back to New Zealand dollars. Therefore, section EX 46(10)(cb) of the Income Tax Act 2007 would 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.

I consider that it is appropriate for New Zealand resident investors to use the fair dividend rate method to calculate FIF income from their attributing interest in the Russell MSV Fund. Although the Russell MSV Fund invests in assets predominantly comprising financial arrangements and New Zealand resident investors may enter into related New Zealand dollar hedging arrangements, the overall arrangement contains sufficient risk so that it is not akin to a New Zealand dollar-denominated debt investment.

Scope of determination

This determination applies to shares held by New Zealand resident investors in the Russell MSV Fund.

The Russell MSV Fund achieves its investment objectives by investing in global equity indices and volatility indices through derivative instruments (exchange traded or over-the-counter and including futures and options) with the aim of removing directional or market exposure and for hedging or efficient portfolio management purposes. For the purposes of covering the derivative positions, the Russell MSV Fund also invests in cash and cash equivalents (including money market instruments, cash deposits, commercial paper and certificates of deposit).

This determination is made subject to the following conditions:

1. The investment in the Russell MSV Fund is not part of an overall arrangement that provides 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 Russell MSV 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

“Russell MSV Fund” means the Russell Investments Multi Strategy Volatility Fund, being a sub-fund of an Irish company incorporated on 10 November 2004 known at the date of this determination as Russell Investment Company IV plc.

Determination

This determination applies to an attributing interest in a foreign investment fund, being a direct income interest in the Russell MSV Fund. This is a type of attributing interest for which the investor may use the fair dividend rate method to calculate foreign investment fund income from the interest.

Application Date

This determination applies for the 2020 and subsequent income years.

However, under section 91AAO(3B) of the Tax Administration Act 1994, this determination does not apply for a person and an income year beginning before the date of the determination unless the person chooses that the determination apply for the income year.

Dated this 28th day of November 2019.

John Trezise
Technical Specialist