NZ investors in the local dollar-hedged version of the Daintree Core Income Trust have received some tax clarity following an Inland Revenue Department (IRD) determination last week.
In the ruling, the IRD confirm investors in the NZ-dollar hedged version of the Australian-based Daintree fund would not be subject to the fair dividend rate (FDR) tax calculation method.
Under FDR investors are taxed on a deemed annual return of 5 per cent.
Essentially, the IRD determination classes the hedged Daintree fund – a popular product in the NZ market – as a local bond investment with actual returns taxed using the comparative value approach.
While the Daintree product, structured as an Australian unit trust, is classed as a foreign investment fund (FIF), the IRD determination says the hedging arrangements “effectively provide investors in this class with a New Zealand dollar denominated return on the financial arrangements held by the Fund”.
“The policy intention is that the FDR method of calculating FIF income should not be applied to investments that provide a New Zealand resident investor with a return similar to a New Zealand dollar denominated debt investment,” the IRD ruling says. “It is appropriate for the Commissioner to take into account the whole of the arrangement in ascertaining whether an investment in a FIF provides the New Zealand-resident investor with a return akin to a New Zealand dollar denominated debt investment.”
Many offshore-domiciled bond funds have sought similar determinations, which the IRD considers on a case-by-case basis.
Clayton Coplestone, head of Heathcote Investment Partners – the third-party marketing business that represents Daintree in NZ – said the firm sought the IRD determination following a number of queries from local investors.
“There are a variety of ways to interpret tax on debt instruments,” Coplestone said. “But without the determination [on the Daintree product] no-one could know for sure which method to use.”
The Daintree fund “invests in a portfolio of global fixed interest securities and other financial arrangements”, the IRD says.
According to the latest product update, the Daintree Core Income NZ dollar-hedged fund held over NZ$580 million at the end of August – about on par with the Australian currency version that reported about A$560 million at the same time.
Daintree has five products on the menu with another – the Hybrid Opportunities Fund – set for launch soon.
The new vehicle “will invest in a diversified portfolio of carefully selected Australian and global hybrid securities, to provide a regular and steady income stream with reduced volatility”, Daintree told investors last week.