Deductions from income attributed to notified foreign investors

New Zealand-sourced interest and dividend income of a non-resident is taxed on a gross basis, that is no deductions are allowed. So the income attributed to a notified foreign investor also cannot have deductions claimed against it. This means the PIE will need to track income and expenditure relating to notified foreign investors to ensure the correct tax calculations are made. Generally this will mean the PIE will pay tax on the assessable income of its notified foreign investors. Any calculations made for a class that includes notified foreign investors will need to treat the notified foreign investors as if they were in a separate class.

PIE's and investment income

Generally the PIE would only derive investment income such as interest, dividends, income under the financial arrangement rules and income from land.

There are two rules are in place to simplify the information and tracking requirements of deductions for income under the financial arrangement rules and income from land, so that no deductions at all are allowed for notified foreign investors.

A non-resident is not required to calculate income under the financial arrangements rules, so when a PIE attributes this type of income to a notified foreign investor they can zero rate that income. Accordingly no deductions will be allowed for that income.

However, for income from land such as rental income a non-resident would normally be allowed deductions incurred in gaining the rental income. So to remove the complication of tracking deductions for income from land foreign investment, PIEs are not permitted to own New Zealand land or derive any income from the land including from disposing of land. They are also unable to own options or rights in land.

No deductions can be claimed by the PIE for this income. This again aligns the treatment of non-residents investing in New Zealand debt and equity investments. Non-residents investing directly in New Zealand debt or equity are taxed on a gross basis.

Land investment companies

Foreign investment PIEs are allowed to own up to 20% of a New Zealand-based land investment company, provided it is not part of a group of companies, one of which is the PIE.

This allows the PIE to have an investment in land that will provide them with an income amount, that is dividend return that could be attribute to the notified foreign investor on a gross basis.

This is consistent with the general principle in the PIE rules that PIEs can generally own up to 20% of any entity invested into. The 20% level should ensure independence in the operation of the land investment company.

A foreign investment PIE is allowed to hold up to 100% of a land investment company resident outside New Zealand. This income is not liable for New Zealand income tax when attributed to a notified foreign investor.

Date published: 30 Aug 2011

Back to top