FIF Tax Regime - Any Spreadsheets?

[777]

With regards to the Macquarrie CMT account, Macquarrie did send a letter out that says FDR or CV could be used for the 2007-2008 year but that only CV is to be used for future years.

Moneyline have also followed this line of thinking.

Have done the numbers using both methods and it is advantageous (in my case, anyway) to use FDR.

[Jessie]

My Macquarie CMT had a balance of $20,000 on April1 2007. It earned $1,500 interest and had $3,000 foreign exchange gains. Other overseas investments totalled $90,000 (excluding Australian exempt shares and GPG). These investments suffered net losses of $8,000.

Therefore using the FDR method I would pay tax on 5% of $110,000, ie, $5,500.

Using the CV method, as 4,500-8,000 is less than zero, I pay no tax. I will therefore use the CV method.

As I understand it (probably incorrectly), if this had happened in FY2009, I could still apply the CV method to my other overseas investments paying zero tax, but would have to treat Macquarie CMT separately from other investments, applying the CV method, and therefore paying tax on $4,500. But perhaps I don't have to keep it separate from other investments - this is unclear to me. And according to SNOOPY, in both FY2008 & FY2009, Macquarie CMT is excluded completely from FIF, and I should pay tax on interest only, ie $1,500.

All a bit confusing, but my final decision is to pay no tax.

[Snoopy]

With regards to the Macquarie CMT account, Macquarie did send a letter out that says FDR or CV could be used for the 2007-2008 year but that only CV is to be used for future years.

Moneyline have also followed this line of thinking.

Moneyline parroting a letter from Macquarrie does not make that letter more valid. However, in this instance after rereading my IRD references I do agree with what Macquarie are saying (with the caveat that they have not given investors the full story).

Here is why.

From the March 2008 IRD Tax Information Bulletin: An extract from the discussion about FDR2008/2 the Macquarie CMT "that does not form part of the determination".

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"However, I consider it is not appropriate for New Zealand resident investors to use the fair dividend rate method. Due to the nature of the overall arrangement (as described to me by the applicant) , application of the FDR method would impose unnecessarily high compliance costs on New Zealand investors each of whom would be required to perform a substantial number of quick sale calculations and associated foreign exchange calculations every time they withdrew funds from the non-resident issuer during the year."

Determination applies for 2007-2008 and subsequent income years.

David Carrigan, Policy Manager, Inland Revenue, dated 8th February 2008

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When I first read that I in my own mind substituted FIF for FDR and assumed the FIF regime did not apply to the Macquarie CMT. But it seems I was wrong. The Macquarie CMT is subject to the FIF regime and because the FDR option has been ruled out, that means you have to use CV.

Can you see why I made my mistake though? Carrigan's explanation is quite correct about all those extra calculations under the FDR method and the 'quick sale' rules. But what Carrigan doesn't mention is that if you use the CV method you *also* have to account for inflows and outflows from your account during the year at the appropriate exchange rate. Applying CV to an account like this is exactly as labour intensive as applying FDR with the quick sale rules. So the reason for specifying CV by default is IMO mad, because you still have to do all the 'unnecessarily high compliance cost' paperwork anyway! Perversely Carrigan's reasoning *does* make sense if you substitute FIF for FDR.

We can't undo Carrigan's ruling. But judging from Carrigan's written reasoning, it looks like he didn't understand what he was doing when he made it! Notice though that the above ruling *does* apply to the FY2007-2008 year.

Now if we go to page 113 of the April 2008 IRD "Tax Information Bulletin"

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"Determinations may be made for the income years specified by the commissioner in the determination. However a determination does not apply for a person and income year beginning before the date of the determination, unless the person chooses that the determination apply for that income year. This election would typically be evidenced by the investor completing their income tax return for the relevant year in accordance with the determination."

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So that is why Macquarie say that CMT investors have a choice. Despite the determination specifically outlawing FDR for the 2007-2008 income year, this determination was only made on 8th February 2008. Because the 2007-2008 income year began before that on 1st April 2007, CMT holders can agree whether to abide by it or not.

So sorry Macquarie CMT holders. I got it wrong and your head office got it right after all.

SNOOPY

discl: not a Macquarie unit holder

[Deev8]

I finally received my IR3 form in the mail yesterday and was dismayed to find that if I held foreign shares, I "may be required to complete a disclosure form for interests in a foreign company" and that I needed to call 0800 377 774 to get the appropriate disclosure form ... to spare anyone else 20 minutes of listening to random, unsolicited tax advice, nodding off to dreary music and confusing the IRD call centre staff, I can pass on the answer I eventually received - that is that the form should be available on the web-site in late May (i.e. any day now) and will be called "IR477".

That's useful information. When I went through the same process with the IRD Call Centre I was finally told that the form required was IR607. Once I downloaded it I realised that it certainly wasn't the form required. If anyone's interested IR607 is a "Foreign trust disclosure" form "to be completed by resident foreign trustees".

I hadn't summoned-up the energy to go through the whole thing again, so I'll take a look at IR477 when it appears.

[Deev8]

This is a mess, & as an Accountant i believe this area needs simplification

It certainly needs far greater clarity.

[Snoopy]

However, in this instance after rereading my IRD references I do agree with what Macquarie are saying (with the caveat that they have not given investors the full story).

So sorry Macquarie CMT holders. I got it wrong and your head office got it right after all.

SNOOPY

discl: not a Macquarie unit holder

Despite my apology I do not consider Macquarie is off the hook entirely. There is a third option which Macquarie did not tell you CMT holders about. That's because the third option was only announced in the April 2008 IRD TIB publication, under the larger heading 'Remedial Amendments', beginning on or after 1st April 2007. These amendments came out *after* the March letter that Macquarie sent to you all. I refer to a paragraph on page 111 which I will now quote:

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Australian Unit Trusts Exemption

Section EX 33D of the Income Tax Act 2004 and section EX 32 of the Income Tax Act 2007 provide that investments in certain types of Australian unit trusts are exempt from the foreign investment fund rules.

<snip>

The exemption has also been expanded to include investments in Australian unit trusts that distribute at least 70 percent of their income and use an RWT proxy. This minimum distribution requirement addresses policy concern that these investment vehicles could be used to defer New Zealand tax.

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That exemption would certainly cover the Macquarie CMT. However, because it was not gazetted until April 2008, my reading between the lines is that it won't become absolutely binding until the April 2009- March 2010 tax year. By my reading of the rules, Macquarie CMT holders have the following choices.

2007-2008 Tax Year: EITHER declare your Macquarie CMT exempt from the FIF regime. (that means paying tax only on your interest)
OR Use the FIF regime and use either FDR or CV to pay your tax.

2008-2009 Tax Year: EITHER declare your Macquarie CMT exempt from the FIF regime. (that means paying tax only on your interest)
OR Use the FIF regime CV method only to pay your tax.

2009-2010 Tax Year: Macquarie CMT is now exempt from the FIF regime. (that means paying tax only on your interest).

There is one more thing that Macquarie didn't mention. The IRD doesn't allow you to use both the FDR method and the CV method in one year. So before you choose which tax paying method you want to use for your Macquarie CMT, make sure that the method you choose minimises your tax *across your entire FIF portfolio*. What is good for Macquarie CMT on its own, might not be good for for all of your investments taken together.

SNOOPY

[777]

Snoopy, a very well written contribution. Thank you. The whole thing is a can of worms. I am sitting here using the IRD calculator doing various scenarios to minimize the amount I have to pay. The calculator is frustrating at times. It packs up occasionally and all entries have to be re entered. Still I'll get there.

To those of you who got in contact with the IRD, congratulations. After about 40 mins I ended up on an answer phone. Gave them my opinion of the whole department and in particular the whole FIF situation. I had just had the tax guide with my trust delivered with no information on the new system. All a reprint of last years. Totally unacceptable.

I am a bit reluctant to file early as I think there may be more adjustments to the whole thing before long. My guess is the big accounting firms are having the same difficulty as us understanding it and are in continual contact with the IRD about it. Combined with very few in the department also understanding it must get some action.

[Snoopy]

My Macquarie CMT had a balance of $20,000 on April1 2007. It earned $1,500 interest and had $3,000 foreign exchange gains. Other overseas investments totalled $90,000 (excluding Australian exempt shares and GPG). These investments suffered net losses of $8,000.

Therefore using the FDR method I would pay tax on 5&#37; of $110,000, ie, $5,500.

Yes but just to make it quite clear, the tax you pay would be your marginal tax rate times $5,000. Not $5,000.

Using the CV method, as 4,500-8,000 is less than zero, I pay no tax. I will therefore use the CV method.

For you, that is a good decision. The CV method is the way to go.

As I understand it (probably incorrectly), if this had happened in FY2009, I could still apply the CV method to my other overseas investments paying zero tax, but would have to treat Macquarie CMT separately from other investments, applying the CV method, and therefore paying tax on $4,500. But perhaps I don't have to keep it separate from other investments - this is unclear to me.

No you can't and won't be able to ring fence one FIF investment from any others. The whole lot must be considered together as one tax paying sub-entity.

And according to SNOOPY, in both FY2008 & FY2009, Macquarie CMT is excluded completely from FIF, and I should pay tax on interest only, ie $1,500.

Don't believe me, go and look up the references I quoted and read it first hand for yourself! If you fill in your tax return and tell the IRD that 'Snoopy told you to do it that way' it will cut no ice with the IRD. You probably saw that I have revised my opinion as to what the correct rules are for paying tax on that Macquarie CMT now:

2007-2008 Tax Year: EITHER declare your Macquarie CMT exempt from the FIF regime. (that means paying tax only on your interest)
OR Use the FIF regime and use either FDR or CV to pay your tax.

2008-2009 Tax Year: EITHER declare your Macquarie CMT exempt from the FIF regime. (that means paying tax only on your interest)
OR Use the FIF regime CV method only to pay your tax.

2009-2010 Tax Year: Macquarie CMT is now exempt from the FIF regime. (that means paying tax only on your interest).

SNOOPY

[Snoopy]

1. As noted, CV is zero this year. But can I deduct withholding taxes from FIF investments from my other income?

From the IRDs 'Agent's Answers' Issue 94, September 2007. Look for the heading:

"Recent Changes to the FIF Rules You need to consider."

There are various bullet points listed and number five is:

"The removal of FIF loss ring fencing, except for loss calculated under the branch equivalent method."

Given that we aren't using the branch equivalent method, what do you make of that?

SNOOPY

[Jessie]

Thanks for your detailed explanations and research Snoopy. I think I now understand the status of Macquarie CMT under FIF. I still am unclear whether I can claim withholding tax against other income. Hopefully this will soon be clarified. There must be tens of thousands of taxpayers puzzling over these issues at present, or maybe they are just ignoring the new rules.