Threshold rules - 5% and 1%

Foreign investment zero-rate PIE investment strategy

The foreign investment zero-rate PIE will have an investment strategy that is focused on offshore markets. The zero-rate PIE may hold a:

• small amount (5% or less) of New Zealand-based investments as a source of ready cash to cover day to day expenditure, ie. debt instruments on call or with a term of 90 days or less, and
• smaller amount (1% or less) of New Zealand-based equity holding to cater for the situation where a PIE has an investment that tracks a global index and that index includes New Zealand-based equity investments.

Income from New Zealand-based (financial arrangements) debt instruments for notified foreign investors

The income from New Zealand based (financial arrangements) debt instruments for notified foreign investors is limited to the coupon return (interest income) and not the full income that maybe calculated using the financial arrangement rules. This aligns the treatment of a notified foreign investor in a PIE with the treatment of a non-resident investor who invests directly in New Zealand debt.

The financial arrangement rules do not apply to non-residents. This covers accounts that are on call or that have a term of 90 days or less. This is designed to provide the PIE with sufficient liquidity to run its day-to-day operations (eg funding redemptions, paying day-to-day expenses, applications).

Derivatives such as currency hedge arrangements or other non-interest bearing financial arrangements on foreign investments whether entered into in New Zealand or offshore are ignored for the purposes of the threshold measurements.

The  threshold allows the PIE to treat any income from these sources as if it were offshore income for notified foreign investor. Therefore all income attributed is zero-rated.

The threshold rules reduce the impacts the changes to the tax calculation have on these new PIEs.

Date published: 30 Aug 2011

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