FIF Tax Regime - Any Spreadsheets?

[Jessie]

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

This determination by David Carrigan of IRD not to use the FDR method for Macquarie CMT (Determination FDR 2008/02) which Snoopy has discovered is confusing for two reasons.

1. IRD's reasoning is that FDR would be too complex to apply to this sort of account. However as you say Snoopy, by implication one must use the CV method which is equally complex (except in my case for this year as total income is negative and no tax needs to be calculated).

2. We know that one must choose only a single method (FDR or CV) for all FIF investments. In a normal year, the FDR method would be the best and is generally considered the 'standard' method. But this ruling forces you to use the CV method for CMT, and presumably you will have to apply it to all other FIF investments if you have a CMT account.

Clearly, these sorts of funds should have been excluded from the FIF scheme from the start, and I think it shouldn't have been difficult to foresee these issues.

[Snoopy]

I still am unclear whether I can claim withholding tax against other income. Hopefully this will soon be clarified.

I am trying to be careful not to jump to conclusions Jessie.

The general procedure with tax rules is that the legislation is the base. This is translated into an 'understandable form' for the explanation booklet that is included in your tax guide. Finally the Commissioner of Inland Revenue has the legislative power to make binding interpretations when the implication of the law is not clear.

As for the IRDs 'Agent's Answers' Issue 94, September 2007, I don't think you will go too far wrong following the advice dished out there. After all, this is supposedly the information that tax specialists use as guidance for how to conduct their own businesses. However 'Agents Answers' does not have the same legal status as an Act of Parliament or a determination by the Inland Revenue Commissioner.

I know for sure that under the old FIF regime, all the tax paid under the FIF rules was ring fenced. That meant that if you made a loss you were not allowed to offset that against your New Zealand and grey list country income for that income year. The loss could however be carried over to the next financial year and offset against future FIF income.
This has now changed. While you don't pay tax on your annual FIF losses, at least as an individual, you do not get to carry those losses over to the following tax year either.

"The removal of FIF loss ring fencing, ..." is specifically referred to in "Agents answers". I haven't located the corresponding legal clauses yet. Until I see what the underlying legislation says I am reluctant to put my own interpretation on this comment which has no legal status in its own right.

Deev8 has previously highlighted on this thread the note on page 21 of the IR3 guide under the heading "Question 17 Overseas Income". This quote in full is as follows:

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Under the new FIF rules, dividends received from overseas companies (except companies covered by the exclusions listed under foreign rights at Question 38) are no longer separately taxable. Generally you would use the new default FIF income calculation method , called fair dividend rate, which does not tax dividends separately. However, the foreign tax deducted from the dividend can be claimed as a credit against the tax payable on the calculated FIF income.

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Deev8 then says
"The statement is saying that the foreign tax that you have paid can only be used to reduce the tax payable on your calculated FIF income. It can't be used to reduce the tax payable on your income arising within New Zealand"

I agree that on casual reading that is the interpretation that many people might take. But I don't agree with Deev8's interpretation. 'Generally' the amount of tax deducted from overseas sources will be insufficient to meet your FIF tax obligations in New Zealand. But not always! And for most FIF taxpayers I am picking that the overseas tax deductions made are greater than those required under the FIF regime for FY2007-2008. Thus for the 2007-2008 year many taxpayers will have excess FIF tax credits. If you go with the 'Agents Answers' these losses are no longer ring fenced and so by implication *can* be transferred to offset other income tax liabilities.

Deev8 goes on to quote page 22 of the IR3 guide

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Overseas Tax Credits

"If you paid tax overseas you can claim it as a credit against your tax. The amount of credit is the lesser of the actual amount of tax paid on overseas income or the amount of tax you would pay in New Zealand on the same amount of income."

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Deev8 then goes on to comment on that statement
"Using the CV method the majority will find that their calculated FIF income is zero, so the amount of credit you can claim for the foreign tax that you have paid is also zero."

"The statement seems to confirm that. If the calculated FIF income is zero, then the amount of tax you would pay in New Zealand on the same amount of income would be zero and the amount of credit you can claim for the foreign tax that you have paid is also zero."

Deev8s comments make sense. But I think he may be reading more 'sense' into the IRD statement than is actually there. This IRD quoted statement has not changed from last years IR3 instructions - it is word for word identical. So it was not written with the new FIF regime in mind. I'm not saying Deev8 is definitely wrong. I am saying there is more than one way to interpret this statement.

IMO this IRD quoted statement is there simply to cover the case where the amount of dividend withholding or capital gains tax deducted at source is greater than your marginal tax threshold. For example, if say 50% tax was deducted from a dividend at source you could not claim all of that tax against tax payable in New Zealand because the highest marginal tax rate payable here is 39%.

SNOOPY

[Snoopy]

This determination by David Carrigan of IRD not to use the FDR method for Macquarie CMT (Determination FDR 2008/02) which Snoopy has discovered is confusing .

2. We know that one must choose only a single method (FDR or CV) for all FIF investments. In a normal year, the FDR method would be the best and is generally considered the 'standard' method. But this ruling forces you to use the CV method for CMT, and presumably you will have to apply it to all other FIF investments if you have a CMT account.

That is exactly the point Jessie, and you have put it more succinctly than I did. If you become locked into CV thanks to using it for your Aussie cash management trust AND have a good year on the sharemarket THEN you will pay far more tax than Cullen/Dunne intended you to pay when they designed the new FIF regime.

Clearly, these sorts of funds should have been excluded from the FIF scheme from the start, and I think it shouldn't have been difficult to foresee these issues.

Big changes in legislation like this always have unforseen consequences. I don't think you can be too hard on the tax department for not plugging all of the holes in advance.

Nevertheless Jessie, if you look at the April TIB determination I quoted, the Macquarie CMT *has* been excluded from the start (if you so choose it), exactly as you said it should have been. It is only because this FIF exemption is retrospective that you have these other options of FDR and CV for this year, and CV for next year.

SNOOPY

[Deev8]

Deev8s comments make sense. But I think he may be reading more 'sense' into the IRD statement than is actually there.

Quite possibly. The IRD statements on credit for tax paid overseas are anything but clear and consistent.

[Jessie]

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.

The IR477 form is only required for those with an income interest of 10% or greater in a foreign company.

[Lizard]

The IR477 form is only required for those with an income interest of 10% or greater in a foreign company.

Thanks for that Jessie! I had a feeling that might be the case, but thought I had better at least attempt to follow the instructions in the IR3. I have decided to just send in my tax return with the print out from my spreadsheet and see what happens.

[777]

Thanks for that Jessie! I had a feeling that might be the case, but thought I had better at least attempt to follow the instructions in the IR3. I have decided to just send in my tax return with the print out from my spreadsheet and see what happens.

Lizard why send in a printout. Just fill in the final gross income figure and send. Let them approach you if they want to query what you have entered. By including the print out you open yourself to them looking closer at how you calculated it.

[Deev8]

The IR477 form is only required for those with an income interest of 10% or greater in a foreign company.

So it is!

Of course that means that we still don't know what the appropriate disclosure form is. The IR3 Guide tells us:

If at any time during the 2008 income year you held rights such as shares, units or an entitlement to benefit in any foreign: company, unit trust, superannuation scheme or life insurance policy, you may be required to complete a disclosure form for interests in a foreign company or for foreign investment funds to disclose the interest and/or attribute income. Call 0800 377 774 to get the appropriate disclosure form.

It also says:

The previous grey list exemption has been removed for interests of less than 10%.

[Deev8]

Thanks for that Jessie! I had a feeling that might be the case, but thought I had better at least attempt to follow the instructions in the IR3. I have decided to just send in my tax return with the print out from my spreadsheet and see what happens.

But the issue is how to complete question 38 on the IR3?

[Snoopy]

Originally Posted by Jessie:
"The IR477 form is only required for those with an income interest of 10% or greater in a foreign company."

So it is!

Of course that means that we still don't know what the appropriate disclosure form is. The IR3 Guide tells us:

If at any time during the 2008 income year you held rights such as shares, units or an entitlement to benefit in any foreign: company, unit trust, superannuation scheme or life insurance policy, you may be required to complete a disclosure form for interests in a foreign company or for foreign investment funds to disclose the interest and/or attribute income. Call 0800 377 774 to get the appropriate disclosure form.

The 'old' FIF regime single company 'comparative value' declaration form was the IR441, if that is any help (I suspect it might not be).

SNOOPY