New Zealand Inland Revenue has initiated a public consultation the draft interpretation statement, PUB00458 Income Tax – Using the Cost Method to Determine Foreign Investment Fund (FIF) Income, explaining when a resident investor can choose to apply the cost method to calculate their FIF income on shares held in foreign companies, on 22 October 2024.
The consultation is set to conclude on 29 November 2024.
This interpretation statement clarifies that a New Zealand resident investor can choose to apply the cost method to calculate foreign investment fund (FIF) income on shares held in foreign companies if the market value of their shares at the start of their income year is not readily available (ie, not easily obtained).
The cost method will generally be unavailable for listed shares as the market value of the shares will be readily available from a recognised exchange.
The cost method will generally be available for unlisted shares. This is because often the market value of such shares will not be readily available without spending the time and resources to determine the market value of the company and its shares. Each case should be looked at in light of its own facts. For example, the market value could be considered to be readily available (and thus the cost method would be unavailable) where the company or fund manager provides an approximate market valuation of the shares as at the start of the investor’s income year.
The decision process for being able to use the cost method is summarised in Figure | Hoahoa 1: When an investor of ordinary shares in a foreign company can use the cost method.
This interpretation statement also clarifies that an independent valuation is often not required to access the cost method. However, in certain circumstances an independent valuation may be required on entry to the cost method, such as where a previous exemption from the FIF rules ceases to apply for the investor.
Overview of the FIF rules:
The FIF rules apply to a person if they are a New Zealand tax resident who has certain kinds of investments overseas and no FIF exemption applies. FIF investments include a direct income interest in a foreign company, which can be a foreign unit trust.
A person may have FIF income if they hold rights in a FIF investment that is an attributing interest in a FIF2 and they are not exempt. Two common exemptions from the requirement to return FIF income are for transitional residents and attributing FIF interests where the investor’s total cost does not exceed NZD 50,000.
Where the FIF rules apply, a New Zealand investor must calculate and return FIF income on attributing interests in FIFs held. Section EX 44(1) provides five methods for calculating the amount of FIF income for an attributing interest:
- the fair dividend rate (FDR) method;
- the comparative value (CV) method;
- the cost method;
- the deemed rate of return (DRR) method; and
- the attributable FIF income method.
Section EX 44(2) places restrictions on which method a person can choose with reference to other sections in the Act. For example, s EX 47 requires a person to use the CV method or the DRR method for an attributing interest in a non-ordinary share.
A wide range of investments can be an attributing interest in a FIF and several methods for calculating FIF income are possible depending on the investment unless stated otherwise, this interpretation statement focuses on an attributing interest in a FIF where:
- the New Zealand tax resident investor owns ordinary shares in a foreign company, or units in a foreign unit trust;
- the share is not subject to a returning share transfer or share reorganisation;
- the total cost of all the investor’s attributing FIF investments is over NZD 50,000;
- the investor is not a transitional resident; and
- the investor is not seeking to change the FIF calculation method applied in a previous income year
