by David Chaplin
In the two determinations published this month, the IRD said investors in the two Australian-domiciled international bond funds - the EQT PIMCO Wholesale Global Bond Fund and the AMP Future Directions International Bond Fund - would not be able to use the FDR method if they hedged at least 80% of their value back to the $NZ.
While the IRD used slightly different logic in reaching its conclusions for the two funds, the two determinations essentially prevent investors from using separate hedging arrangements to take advantage of the FDR rules.
"It is appropriate for the Commissioner to take into account the whole of the arrangement, including any interposed entities or financial arrangements, in ascertaining whether an investment in a FIF [foreign investment fund] provides the New Zealand resident investor with a return akin to New Zealand dollar denominated debt investment," IRD policy manager, David Carrigan, said in the EQT PIMCO fund determination.
Paul Mersi, PricewaterhouseCoopers financial services partner, said the AMP international bond determination represented the "first manifestation" of the IRD policy preventing New Zealand investors from using hedging arrangements separate from investments in the underlying global bond security in order to take advantage of the FDR regime.
Mersi said financial advisers should acquaint themselves with the new determination in order to raise the issue with how it might affect clients who have invested in similar arrangements.
"There's a potential issue of differential [tax] treatment," he said.
Last September the IRD permitted investors in the PIMCO Cayman Global Bond Fund ($NZ hedged), sold principally by Tower, to apply the FDR rules, which commit investors to paying tax on a deemed return of 5% per annum. Without an FDR determination investors in $NZ hedged global bond funds would have to pay tax, or claim deductions, based on actual returns.
"I would normally have concerns about using the FDR method for such investments. However, I consider that an investment in an actively traded debt portfolio can be more akin to equity than debt," Carrigan said in the earlier ruling.
Tony Hildyard, former head of Tower Investments and now marketing PIMCO funds in New Zealand, said while both the Australian-domiciled and Cayman-based products are managed to the same benchmark they would likely experience different levels of volatility.
"Ultimately, there are [volatility] parameters within IRD," Hildyard said.
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