Determination - Use of fair dividend rate method for a type of attributing interest in a foreign investment fund
Covers NZ investors' ability to use the fair dividend rate method to calculate FIF income from a type of attributing interest in a FIF.
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 Deputy Commissioner, Policy, under section 7 of the Tax Administration Act 1994.
Discussion (which does not form part of the determination)
Units in a non-resident issuer to which this determination applies are an attributing interest in a FIF for NewZealand resident investors. New Zealand resident investors are required to apply the foreign investment fund rules to determine their tax liability in respect of their units in the non-resident issuer each year.
Due to the presence of specified lock-in thresholds, section EX 40(9) of the Act applies to units in the non-resident issuer and prevents use of the fair dividend rate method in the absence of a determination under section 91AAO of the Tax Administration Act 1994.
Despite the presence of specified lock-in thresholds, I consider that it is appropriate for New Zealand resident investors in this arrangement to use the fair dividend rate method. The overall arrangement (as described to me by the applicant) contains sufficient risk so that it is not akin to a New Zealand dollar-denominated debt instrument that effectively provides guaranteed returns.
Scope of determination
The investments to which this determination applies are units in a non-resident issuer which:
- is one of the Credit Suisse PL100 series of trusts;
- is a unit trust constituted under New South Wales law;
- issues New Zealand dollar denominated units (not being fixed rate shares or non-participating redeemable shares) to New Zealand resident investors;
- indirectly offers New Zealand resident investors the benefit of capital protection and rising capital protection;
- invests proceeds from the issue of units in a physical basket of securities upon which dividends may be paid;
- converts any dividends derived from the physical basket of securities to New Zealand dollars and distributes such dividends to New Zealand resident investors from time to time; and enters into a specified call and put option arrangement in relation to a hedging portfolio.
In this determination, unless the context otherwise requires-
"Capital protection" means an arrangement under which an investor receives an amount from the issuer equal to the New Zealand dollar issue price for each unit held by the investor at maturity;
"Fixed rate share" means a fixed rate share under sectionLF 2(3) of the Act;
"Hedging portfolio" means a notional portfolio of shares and fixed income securities that requires 25% minimum participation in notional share investments at all times;
"Non-participating redeemable share" means a non-participating redeemable share under section CD 14(9) of the Act;
"Non-resident" means a person that is not resident in NewZealand for the purposes of the Act;
"Physical basket of securities" means a portfolio of shares or other securities physically held by the issuer;
"Rising capital protection" means an arrangement under which an investor receives an amount from the issuer which exceeds the New Zealand dollar issue price for each unit held at maturity if any specified lock-in threshold is reached, irrespective of the value of the issuer's underlying investments at maturity;
"Specified call and put option arrangement" means an arrangement consisting of two separate option contracts entered into simultaneously by the issuer and a counterparty under which:
- the issuer is able to transfer the physical basket to the counterparty in exchange for an amount equal to the value of the hedging portfolio (in New Zealand dollars) if the value of the hedging portfolio at maturity (less a portfolio fee) is equal to or greater than the value of the physical basket; and
- the counterparty is able to require the issuer to pay the counterparty the shortfall in value between the physical basket and the hedging portfolio (in New Zealand dollars) if the value of the hedging portfolio at maturity (less a portfolio fee) is less than the value of the physical basket;
"Specified lock-in threshold" means the level of growth in value of the hedging portfolio (adjusted downwards for dividends paid to investors on their units), expressed as a percentage of the value of the hedging portfolio at the commencement of the investment term, which is determined by the issuer at the commencement of the investment term to be a specified lock-in threshold;
"The Act" means the Income Tax Act 2004.
An attributing interest in a FIF to which this determination applies is a type of attributing interest for which a person may use the fair dividend rate method to calculate FIF income from the interest.
This determination applies for the 2007-08 and subsequent income years.
Deputy Commissioner, Policy
12 October 2007