The FIFth wave: the FIF reforms continue

By Joe Sothcott and Sam Mathews

The Taxation (Annual Rates for 2026–27, FBT Simplification, Foreign Investment Funds, and Remedial Measures) Bill (the Bill) proposes an array of tax changes, including significant reforms to the foreign investment fund (FIF) rules. We explore the proposed changes in this issue of Tax Alert.

Expanded access to the revenue account method

The revenue account method (RAM) was introduced in last year’s tax omnibus bill. Broadly, the RAM allows investors to calculate income from certain foreign shares based on dividends plus 70% of any realised gains. Most in-scope investors could apply the RAM to unlisted shares, with US citizens and Green Card holders able to apply the RAM to both unlisted and listed shares (extended RAM). In-scope investors could apply the RAM rather than applying a FIF method such as the cost method or the fair dividend rate (FDR), which broadly deem taxable income to be 5% of the shares’ cost or market value, regardless of whether any amounts are realised from the investment. We have written extensively about the RAM, tracing its development from the initial proposal through to enactment in March 2026. For further background, see our previous articles:

• How’s the fit? Reducing the tax barrier for migrants and returning expats (Tax Alert February 2025)
• A step in the right direction? The revenue account FIF method is coming—what we know so far (Tax Alert April 2025)
• Revenue Account Method: Government’s opening move or missed opportunity? (Tax Alert September 2025)
• A small step: the Revenue Account Method enacted (Tax Alert May 2026)

One limitation of the RAM, however, is that it has been available only to new migrants and certain returning New Zealanders. As a result, only a small pool of taxpayers have been able to use the method to calculate their FIF income.

In a positive development, the Bill proposes expanding access to the RAM to all New Zealand-resident individual taxpayers from 1 April 2026. The RAM would also be available to trustees where the trust’s principal settlor is a natural person who is a New Zealand tax resident.

The proposed expansion is accompanied by consequential amendments. The current rules are highly restrictive about when taxpayers can opt into or out of the RAM. The Bill introduces greater flexibility through a five-year consistency rule applying in both directions: once a taxpayer opts into the RAM, they must use it for five years; once they opt out, they cannot use it again for five years. The Bill also proposes tidy-up amendments where people are non-New Zealand resident under a double-tax agreement.

While there will be ongoing debate about whether the design of the RAM will mean it achieves it policy intent, increased access to the RAM is positive in that it provides an option for taxpayers to be taxed on a realisation basis for certain foreign share investments. Taxpayers will need to carefully weigh-up using the RAM vs standard FIF methods.

Lifting the FIF de minimis threshold

A welcome change for many investors will be the proposed increase of the FIF de minimis threshold from $50,000 to $100,000 with effect from 1 April 2026. Under the current FIF de minimis, where the total cost of all of an investor’s foreign shares (subject to certain exclusions) is below $50,000, they do not have to apply the FIF rules. However, inflation has eroded the value of the threshold since it was last set in 2000. The increase to $100,000 sets a more appropriate level and fully accounts for the inflation impact. Taxpayers with costs below the threshold are still able to apply the FIF rules if they wish (subject to consistency requirements). There are also consequential changes throughout the legislation to account for the increase.

Expanded access to the attributable FIF income method

The attributable FIF income (AFI) method is currently available to certain taxpayers holding an interest of 10% or more in a FIF. Under this method, FIF income is calculated broadly by applying the controlled foreign company (CFC) rules, often resulting in only dividends, if any, being taxed. The Bill proposes a welcome change that would preserve access to the AFI method where a taxpayer’s ownership interest is diluted below 10% and they retain an active role by being a director or employee of the FIF or another company in the same group, or a trustee of a trust whose settlor or beneficiary is such a director or employee.

To qualify, the taxpayer must have used the AFI method in the previous accounting period, or would have been eligible to use it had the FIF interest been subject to the FIF rules. This may apply, for example, where a FIF exemption meant the interest was not an attributing FIF interest, or where a new migrant was not subject to the FIF rules during their transitional residency period. If these requirements are met, the taxpayer’s interest in the FIF would continue to be treated as meeting the 10% threshold in that year and all subsequent years, despite their economic ownership falling below 10%.

While expanding access to the AFI method in these situations is positive, unfortunately the current proposal would restrict access for a number of founders and early-stage employees or investors that are really the target of these changes. This is due to the proposed changes only looking at whether the shareholder applied the AFI method or had a 10%+ shareholding in the immediately preceding accounting period before the FIF rules fully apply. This narrow approach means that those shareholders that are diluted below 10% more than a year before the FIF rules applying (for example, because a FIF exemption expires or a migrant becomes subject to the FIF rules for the first time) would not be able to access the rules.

Two taxpayers in materially identical circumstances could therefore receive different outcomes solely because the dilution occurred one year earlier or later. Interestingly, the commentary to the Bill contains five examples on these changes, which all conclude that the taxpayer in question could now apply the AFI method. However, if the dates in all of the examples are moved out by one year, with no change to any other facts, none of these taxpayers could access the rules. Given these are the same people, with the same skills and capital that we want in New Zealand, this does not appear to be a logical outcome.

Paradoxically, the requirement to “not dilute below 10% too early” could disadvantage founders in the most successful and fastest growing businesses, which is not consistent with the policy intent of the rules (which, recognising the positive impact they have on economy, is to attract and keep these people in New Zealand). In our view, the proposal’s integrity concerns are already addressed by requiring the taxpayer to have previously held an interest of at least 10%, retain a substantive active connection with the FIF via the director or employee requirement, and be able to access the necessary financial information to prepare the AFI calculations. 

We hope the proposals will be tidied up during the Select Committee process, and would encourage potentially impacted taxpayers to make a submission.

Changes to the 10-year FIF exemption when listing overseas

The Bill proposes changes to the 10-year FIF exemption where a New Zealand business is acquired by a foreign company in specified circumstances (for example, a “US flip”), to account for situations where the business lists on a foreign stock exchange using a special purpose acquisition company (SPAC). A SPAC listing may disrupt the required continuity of ownership because the FIF is merged into the newly listed SPAC and the shareholders’ existing shares are cancelled and replaced with shares in the SPAC, even though their underlying economic ownership has not materially changed. The proposed rule would allow the exemption to continue following this type of reorganisation, provided the other eligibility requirements are met. Although SPAC listings are the principal focus, the proposal is broad enough to potentially cover other forms of corporate reorganisation, including share-for-share exchanges, amalgamations, mergers and liquidations.

While this is a narrow change, it is great to see the FIF rules continuing to be amended to accommodate for changes in the current business and transaction environment.

Indirect interests in FIFs

The Bill also proposes changes to the rules that apply where a person holds an interest in a CFC, which in turn holds FIF interests. The rules currently restrict the FIF methods available as they apply at the CFC level, meaning for example that the RAM is not available and the standard annual FDR vs comparative value (CV) choice that would otherwise apply for listed shares is not available.

The proposals would now allow the holder of the CFC interest to calculate FIF income using any method that would have been available had they held the FIF interest directly, subject to consistency requirements.

This is a welcome change as there has been uncertainty in how the rules apply in these situations. We are aware that the current rules have not been applied correctly by some other advisers, or indeed by Inland Revenue in their review activity, so these proposals should help clarify the position and result in a sensible outcome. The proposals will apply from 1 April 2026.

Concurrent use of the cost and CV methods

The proposed amendment would clarify that a taxpayer who uses the cost method for a FIF interest without a readily available market value (e.g. an unlisted share) retains the ability to choose to apply either the FDR or CV method for other FIF interests with readily available market values (e.g. listed shares) on an annual and portfolio basis.

This change is in response to some work Inland Revenue officials undertook where they concluded that this may not currently be available under existing legislation. The proposals largely confirm the approach being adopted in practice, so it will be interesting to see if Inland Revenue publish an operational statement as to whether they will look to review prior year positions (given the proposed amendment would apply from 1 April 2026).

Deloitte comment

Overall, the proposed FIF changes are a positive step towards the Government’s objective of attracting and retaining talented individuals in New Zealand. Although the proposals are not yet the finished article (particularly the AFI method proposal), we welcome the Government and officials’ advancement of a broad package of sensible reforms that should have a meaningful practical impact.

The FIF proposals are detailed, and this article provides only an overview of the key changes. If you have any questions about how the proposals may affect you, please contact your usual Deloitte adviser.