Exemption for natural persons with less than $50,000 of FIF interests
Taxation (International Investment and Remedial Matters) Act 2012: FIF rules exemption for persons with less than $50,000 of FIF interests.
Subsections CQ 5(1)(d) and (e) and DN 6(1)(d) and (e) of the Income Tax Act 2007
Key features
Under the previous rules, sections CQ 5(1)(d) and (e) provided an exemption from the FIF rules for natural persons if the cost of all of their attributing interests (for example, their entire foreign share portfolio other than shares exempt from the FIF rules under sections EX 31 to 42) in FIFs was $50,000 or less.
This Act modifies these exemptions to allow these persons to elect to use the FIF rules. This means they would use a FIF calculation method to calculate FIF income from their FIF interests (other than any interests to which the exemptions in sections EX 31 to EX 42 apply).
A person with less than $50,000 of attributing interests in FIFs and who chooses to file a return on the basis of the FIF rules applying is generally required to continue to apply the FIF rules in each subsequent tax year. This is to prevent taxpayers from switching between the FIF rules and dividend taxation, depending on which approach would have provided the most favourable tax treatment in that particular year.
Detailed analysis
Section CQ 5(1) provides the general rule for when an investor has FIF income from their attributing interests in a FIF. Section CQ 5(1)(d)(i) provides that a natural person has FIF income if the total cost of all their attributing interests in FIFs, at any time during the income year, is more than $50,000. If the total cost is less than $50,000, no FIF income arises. Section CQ 5(1)(e)(i) provides a similar exemption for persons acting as the trustee of a trust that meets certain requirements (specified in section CQ 5(5)).
As an alternative to these exemptions, such persons will have the option of applying the FIF rules. To exercise this option a taxpayer simply has to complete their tax return using the FIF rules. This option is provided for by sections CQ 5(1)(d)(ii) and CQ 5(1)(e)(ii).
A person with less than $50,000 of attributing interests in FIFs, and who chooses to file their return on the basis of the FIF rules, is generally required to continue to apply the FIF rules in each subsequent tax year. This is to prevent taxpayers from switching between the FIF rules and dividend taxation, depending on which approach would provide the most favourable tax treatment in that particular year.
However, there is one exception to this general consistency rule. If a person has less than $50,000 of attributing interests in FIFs, they will not be required to apply the FIF rules if, for each of the four previous tax years:
- the person had no attributing interests in FIFs (for example, they had no foreign shares, or only had foreign shares which were exempt from the FIF rules); and/or
- the person had more than $50,000 in attributing interests in FIFs (note that for these years they would have been required to apply the FIF rules).
Example 1
Jane has less than $50,000 of attributing interests in FIFs in 2012, but chooses to include FIF income in her tax return for 2012. She sells all her attributing interests in FIFs during 2012 and holds no attributing interests in FIFs in each of the four years 2013 - 16. In 2017 she purchases some attributing interests in FIFs. These new FIF interests have a cost of less than $50,000.
Because Jane had no attributing interests in FIFs for each of the previous four years, she can choose whether or not to include FIF income in her tax return for 2017. If she does not apply the FIF rules, Jane will instead be taxed on any foreign dividends or disposal of foreign shares that are held on revenue account (consistent with the way New Zealand shares are taxed).
Example 2
Thomas purchases FIF interests in 2012 that had a cost of more than $50,000. For the 2012 year, Thomas is required to include FIF income in his tax return. During 2012 Thomas sells some of his FIF interests so that at the beginning of 2013 he has FIF interests of less than $50,000. Thomas can choose whether or not to include FIF income in his tax return for 2013, because even though he included FIF income in his 2012 tax return, this was because he had more than $50,000 of attributing interests in FIFs in 2012. If he does not apply the FIF rules, Thomas will instead be taxed on any foreign dividends or disposal of foreign shares that are held on revenue account (consistent with the way New Zealand shares are taxed).