FIF remedial: Measurement of cost

Section EX 68 of the Income Tax Act 2007

When the new foreign investment fund (FIF) rules were introduced, a temporary 5-year exemption was provided to companies with significant New Zealand shareholders, such as Guinness Peat Group (GPG). This exemption expired at the beginning of the 2012-13 income year. This means many shareholders in GPG will now need to calculate tax on their GPG shares using the fair dividend rate (FDR) method.

Because of the expiry of the exemption, a minor remedial amendment was required to define how "cost" is measured for the FIF rules.

The FIF rules do not apply to natural persons (individuals) or certain trusts if the cost of their FIF investments is equal to or less than $50,000. For the purposes of determining cost, section EX 68 of the Income Tax Act 2007 provides that a taxpayer can use half an investment's 1 April 2007 value in place of its cost if it was purchased before 1 January 2000. This is because such an investment's cost may not be readily available.

For investments to which the temporary 5-year exemption applied, this modification to "cost" was not appropriate. It may be difficult to obtain price data for long-held investments purchased after 1 January 2000.

Accordingly, section EX 68 has been amended so that a taxpayer can elect to treat an investment in a FIF's cost as its market value at 1 April 2012 if that investment was previously covered by the 5-year temporary exemption and the investment was entered into before 1 January 2005. The investment's market value, as opposed to half its market value (as in the existing rule), must be used because share prices are historically very low.

Application date

The amendment applies from the beginning of the 2012-13 income year.