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Determination FDR 2008/09 - Use of fair dividend rate method for a type of attributing interest in a foreign investment fund (ABN AMRO Global Equities Hindsight Trust)

Reference

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 position of Policy Manager under section 7 of the Tax Administration Act 1994.

Discussion (which does not form part of the determination)

Units in the ABN AMRO Global Equities Hindsight Trust ("Hindsight Securities") to which this determination applies are an attributing interest in a foreign investment fund (FIF) for New Zealand resident investors.

New Zealand resident investors are required to apply the FIF rules to determine their tax liability in respect of their Hindsight Securities each income year.

New Zealand resident investors may be prevented from using the fair dividend rate income calculation method ("FDR method") in the absence of a determination issued pursuant to section 91AAO of the Tax Administration Act 1994 if the options that the ABN AMRO Global Equities Hindsight Trust ("the Trust") invests in are 'out of the money'. This is because the only asset of the Trust would then be a zero coupon bond denominated in New Zealand dollars. Section EX 40(9) of the Act could then operate to disallow the use of the FDR method.

I consider it is appropriate that New Zealand resident investors in Hindsight Securities may use the FDR 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 investment that effectively provides a guaranteed return.

Scope of determination

The investments to which this determination applies are units (not being fixed rate shares or non-participating redeemable shares) in the ABN AMRO Global Equities Hindsight Trust ("Hindsight Securities") as described in this determination:

  1. ABN AMRO Global Equities Hindsight Trust ("the Trust") has offered Hindsight Securities to investors.
  2. Hindsight Securities comprise an investment in units in the Trust.
  3. The Trust in turn has an economic exposure to zero coupon bonds hedged to New Zealand dollars ("NZD") and a mixture of equity index options purchased from ABN AMRO London ("Index Options").
  4. The term of the investment is approximately 5 years.
  5. Depending on interest rates, for every $1 invested in Hindsight Securities approximately 70 cents will be invested in zero coupon bonds and 30 cents in Index Options.
  6. The Index Options comprise options over four global equity indices.
  7. The end product does not provide a guaranteed return over and above the amount originally invested.
  8. The investors will not bear any currency risk.
  9. On maturity, the value of the zero coupon bonds will equal the initial amount invested by the investors. This amount is guaranteed to be repaid to the investors by the Trust and the capital guarantee is effectively achieved through this element of the investment.
  10. At maturity, weightings will be assigned to each of the four global equity indices dependent on how the indices perform. The investment and return made on the derivative pool (if any) will be paid to the investors.
  11. Depending on the amount of cash required to fund the guaranteed return the Hindsight Securities may be able to provide supplementary returns to boost the performance of the investment, through increasing the investors’ participation rate in respect of the performance of the indices. This will be determined at the close of the offer period when the Hindsight Securities are issued to investors.
  12. A distribution may be made by the Trust during the term of the investment. Any such distribution will be contingent on the Hindsight Securities' performance during the term.

Interpretation

In this determination, unless the context otherwise requires -

"Fixed rate share" means a fixed rate share under section LF 2(3) of the Act.

"Non-participating redeemable share" means a non-participating redeemable share under section CD 14(9) of the Act.

"The Act" means the Income Tax Act 2004, or any equivalent provision in the Income Tax Act 2007, as applicable.

Determination

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.

Application date

This determination applies for the 2007-08 and subsequent income years.

Dated at Wellington this 2nd day of April 2008

David Carrigan
Policy Manager
Inland Revenue

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Date published: 08 Apr 2008

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