Allocations and calculations
Issue: Portfolio class land-loss restriction on non-land losses
Submission
(33 – Investment Savings and Insurance Association of NZ Inc)
The proposed land-loss restriction in the rewritten rules in section HM 64 applies to all losses of an investor class. It should be restricted to losses arising from the investments in land or shares in the land investment companies when the required investment threshold is satisfied for the land-loss restriction to apply.
The above scenario could be corrected by amending the definition of “land investment company” to exclude foreign PIE equivalents (referred to as “foreign investment vehicles” in the 2007 Act).
Comment
The submission points out that, in certain circumstances, tax losses of PIEs that own predominantly land (or shares in companies that own predominantly land) caused by foreign exchange losses on hedging contracts can be trapped at the PIE level. The policy intention of the PIE rules was not to allow the flow-through of losses for PIEs owning predominantly land. This was to alleviate the revenue risk of land PIEs generating large tax losses and passing these through to investors. While the foreign exchange losses on hedging can be seen as separate to the land investments, accepting the treatment suggested in the submission is likely to result in a large revenue risk. In addition, the foreign exchange instruments that provide the hedge are integral to the overall land investment and should not be separate from a tax perspective. We therefore recommend that the submission is not accepted.
Recommendation
That the submission be declined.
Issue: Master fund expenditure passed up to a PIE
Submission
(32 – KPMG, 33 – Investment Savings and Insurance Association of NZ Inc, 61 – Trustees Corporations Association of New Zealand)
There should be no restrictions on how much expenditure is passed up to a particular PIE under the proposed changes to the rules on expenditure specific to certain entities in subpart DV.
Alternatively, if the proposed restrictions on expenditure are retained, there should be guidelines on how expenditure should be apportioned.
Comment
Officials have reconsidered the issue and agree that the restrictions proposed in the bill are not practical. The master fund should be allowed to use the expenditure to offset income of the investor across one or more classes in which the investor has an interest. However, the maximum amount of expenditure that can be transferred should be limited to the investor’s portion of the PIE’s income for the relevant calculation period or periods of the PIE. This will prevent expenditure in excess of the investor’s share of the PIE income being rebated to the PIE for the benefit of the investor – which would be an inappropriate result.
The amendment should apply from 1 April 2008, which is the same as the application date for the main expenditure transfer rules as they apply to PIEs.
Recommendation
That the submission be accepted, subject to officials’ comments.
Issue: Formula for calculating maximum deduction for master funds that are portfolio tax rate entities
Submission
(33 – Investment Savings and Insurance Association of NZ Inc)
The current rules should be amended so that the provision that calculates the maximum deduction for expenditure transferred to master funds that are portfolio tax rate entities in section DV 6 should not apply.
Comment
Officials agree that the current rules should be amended so that the provision that calculates the maximum deduction for expenditure transferred to master funds that are portfolio tax rate entities in section DV 6 should not apply. The amendment should apply from 1 April 2008, which is the same as the application date for the main expenditure transfer rules as they apply to PIEs.
Recommendation
That the submission be accepted.
Issue: Minimum threshold for paying rebates
Submission
(31 – NZ Funds)
PIEs that calculate income and pay tax on a quarterly basis should not have to refund amounts that are less than $5 (representing their share of a tax credit) to investors who have fully exited the PIE.
Comment
The issue raised in the submission is part of a broader matter concerning the extent to which PIEs should receive rebates for losses when investors exit funds.
Recommendation
That the submission be declined.