A type of attributing interest in a foreign investment fund for which a person may not use the fair dividend rate method (The Colchester Global Bond Enhanced Currency Fund NZD Hedged Accumulation Class - Z 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 - Network, under section 7 of the Tax Administration Act 1994.

Discussion (which does not form part of the determination)

Investments in the NZD Hedged Accumulation Class - Z-Shares (“NZD Hedged Z-Share Class”) of the Colchester Global Bond Enhanced Currency Fund (“the Fund”), an Irish Managed Investment Scheme, are an attributing interest in a foreign investment fund (“FIF”) for New Zealand resident investors. The Fund is structured as a multi-class Managed Investment Scheme.

New Zealand resident investors are required to apply the FIF rules to determine their tax liability in respect of their investment in shares in the Fund each year.

The Fund invests in a portfolio of global fixed interest securities and other financial arrangements. The Fund has on issue a number of share classes that provide holders of that class of shares with an interest in the pool of investments held by the Fund. The NZD Hedged Z-Share Class of the Fund is a share class denominated in New Zealand dollars . Foreign currency hedging arrangements are in place within the NZD Hedged Z-Share Class of the Fund which effectively provide investors in this class with a New Zealand dollar denominated return on the financial arrangements held by the Fund.

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 NZD Hedged Z-Share Class of the Fund 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 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 the NZD Hedged Z-Share Class of the Fund, I consider that it is appropriate for the investor holding that investment to be excluded from using the FDR method.

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:

1. The non-resident issuer:
   • Is an Irish Managed Investment Scheme;
   • Is known at the date of this determination as the Colchester Global Bond Enhanced Currency Fund; and
   • Is operated with separate classes of shares.
2. The attributing interest consists of the New Zealand dollar denominated class of shares issued in the Colchester Global Bond Enhanced Currency Fund NZD Hedged Accumulation Class – Z Shares, a class of shares that provides exposure solely to the Colchester Global Bond Enhanced Currency Fund that predominantly (i.e. 80% or more by value at a time in the income year) holds financial arrangements such as international fixed interest securities; and
3. The investment assets attributable to the New Zealand dollar denominated class of shares are subject to 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 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

"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 2022 income year 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 applies for the income year.

Dated on this 12th day of May 2021.

Greg Adamson

Technical Specialist Network