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Determination FDR 2009/03: A type of attributing interest in a foreign investment fund for which a person may not use the fair dividend rate method (PIMCO Funds: Global investors Series plc Global Bond Fund)

Reference

This determination is made under section 91AAO(1)(b) of the Tax Administration Act 1994.

This power has been delegated by the Commissioner of Inland Revenue to the position of Policy Manager, Policy Advice Division, under section 7 of the Tax Administration Act 1994.

Discussion (which does not form part of the determination)

Shares in the PIMCO Funds: Global Investors Series plc Global Bond Fund (PIMCO) 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 investment in units in PIMCO each year.

PIMCO invests in global fixed interest securities for which PIMCO has made foreign currency hedging arrangements to provide investors with a New Zealand dollar denominated return on these debt instruments. Section EX 46(10)(c) of the Income Tax Act 2007 would not apply to prevent the use of the fair dividend rate (FDR) method but would apply if the New Zealand dollar denominated share class was the only class of shares issued by PIMCO.

The policy intention is that the FDR method of calculating FIF income should not be applied to investments that provide a New Zealand-resident investor with a return similar to a New Zealand dollar denominated debt investment. It is appropriate for the Commissioner to take into account the whole of the arrangement, including any interposed entities or financial arrangements, in ascertaining whether an investment in a FIF provides the New Zealand-resident investor with a return akin to a New Zealand dollar denominated debt investment.

On this basis, where the New Zealand-resident investor invests in New Zealand dollar denominated shares in PIMCO, I consider that it is appropriate for the investor holding that investment in PIMCO to be excluded from using the FDR method for the 2010-2011 and subsequent income years.

Scope of determination

This determination applies to an attributing interest in a FIF held by New Zealand-resident investors where:

  1. The FIF:
    1. is an Irish company, that issues multiple classes of shares;
    2. is known as "The PIMCO Funds: Global Investors Series plc Global Bond Fund (PIMCO)";
    3. invests into an undivided pool of global bond investments;
    4. undertakes hedging in proportion to the shares issued in each currency. The NZD hedging therefore only covers the proportion of the pool of assets that corresponds to the number of NZD shares.
  2. The investors in PIMCO:
    1. invest into that pool of bond assets through classes of shares that are denominated in various currencies, including one which is denominated in New Zealand dollars (NZD shares);
    2. that are New Zealand residents invest in the New Zealand dollar class of shares of PIMCO.

Interpretation

In this determination unless the context otherwise requires:

"Financial arrangement" means financial arrangement under section EW 3 of the Act;

"Non-residence' means a person that is not resident in New Zealand for the purposes of the Act;

"The Act" means the Income Tax Act 2007.

Determination

An attributing interest in a FIF to which this determination applies is a type of attributing interest for which a person may not use the fair dividend rate method to calculate FIF income from the interest.

Application date

This determination applies for the 2010-2011 and subsequent income years. However, under section 91AAO(3B) of the Tax Administration Act 1994, this determination also applies for an income year beginning before the date of this determination for an investor in PIMCO that chooses that the determination applies for that year.

Dated at Wellington this 10th day of September 2009.

David Carrigan
Policy Manager, Policy Advice Division

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Date published: 01 Feb 2010

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