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Inland Revenue takes on FIF feedback in revised consultation document

Tax Alert - November 2023

By Amy Sexton & Robyn Walker

In late 2022 Inland Revenue issued a somewhat controversial draft QWBA for consultation on the default calculation methodology a taxpayer must use if they have failed to declare Foreign Investment Fund (FIF) income in a tax return. Our February 2023 Tax Alert article outlined our disagreement with Inland Revenue’s proposed position in the consultation document. This disagreement must have been a common thread in the consultation submissions to the Inland Revenue as on 26 October 2023 the Inland Revenue reissued the draft QWBA for further consultation, reversing their previous position.

What does the proposed QWBA now say?

The QWBA now states that a person (a natural person or eligible trustees) has a choice of one of the five FIF calculation methods (subject to certain restrictions), even if they initially fail to declare the FIF income in a tax return and later file a voluntary disclosure or fail to file a tax return by the due date and later file a return which includes the FIF income. The QWBA also explains that if a person does not file a return and the Commissioner of Inland Revenue issues a default assessment, the default assessment will normally be based on the default calculation method. To challenge the default assessment a person will need to file a tax return to challenge the assessment and the person can choose from the available methods to calculate the amount of FIF income to return.

The change in the Inland Revenue position between the two versions of the draft QWBA shows the value of the consultation process and how the Inland Revenue is open to considering the points made in submissions during this process.

The Inland Revenue has also recently issued a Binding Ruling in relation to changing FIF calculation methods, with the ruling made public via a Technical Decision Summary (TDS) under Inland Revenue’s drive to improve transparency over its decision-making. But before we delve further into the technical FIF calculation methodology issues, what exactly are FIFs?


The FIF rules were introduced to combat New Zealand tax residents investing in offshore tax havens with the aim of capturing the foreign-sourced income earned by New Zealand tax residents.

Without specific FIF rules, New Zealand could only tax the income earned in these offshore funds when the dividends/distributions were physically paid out to the New Zealand tax residents. The FIF rules and calculation methods attempt to capture tax on accumulated income or the change in value of the investments and so the rules are a de facto “capital gains tax”, even if those gains are unrealised.

The FIF rules target New Zealand tax residents who have an ownership interest, but not a controlling interest, in certain offshore entities. The methods for calculating FIF income (or loss) are prescriptive, and in most cases, the choice of methods is limited. Currently, there are five FIF income calculation methods; the fair dividend rate method, the comparative value method, the cost method, the deemed rate of return method and the attributable FIF income method. A taxpayer should elect the method they are using by filing their tax return by the due date.

Technical Decision Summary – Changing FIF calculation methods

The Arrangement subject to the Binding Ruling application involved a Trust and a Company (the Applicants) who had been returning their FIF income under the attributable FIF method. The Applicants were seeking to change their FIF calculation method. The general FIF rule is that once a taxpayer uses a particular calculation method for FIF income they must continue to use the same method for the FIF interest in subsequent periods unless they are allowed a change of method under the provisions of the FIF rules in the Income Tax Act 2007. The first issue the Applicants sought the ruling on was to confirm that they met the relevant permissions in the FIF rules to change the calculation method. The Inland Revenue determined that the Applicant met the requirements as:

  • The binding ruling application constituted a notice to the Commissioner of the Inland Revenue of the reason for the change and was given before the first income year/accounting period that the calculation change would be effective; and
  • The Applicants had only returned FIF income using the attributable FIF method, and this was the first time they would change the calculation method.

The second ruling point the Applicants sought was that they were able to use the Fair Dividend Rate (FDR) method. The Inland Revenue ruled that as the FIF interests were shares in foreign companies that were not non-ordinary shares the Applicants were able to choose to use the FDR method.

Finally, the Applicants sought a ruling point on whether the Trust was able to use the Comparative Value (CV) method. The Inland Revenue determined that the Trust was able to use the CV method as the requirements under the FIF rules were met, including that:

  • The Trust was (and had always been) a New Zealand complying trust;
  • The gifting settlors were all natural (or deceased) persons;
  • The Trust had always been for the benefit of natural persons for which the gifting settlors have natural love and affection; and
  • The Trust was not a superannuation scheme.

While the Trust was able to use the CV method, the FIF rules place a number of restrictions on using the CV method, the ruling was issued with a number of provisions place on the Applicants.

So, what can we take away from this TDS?

The background facts of the TDS read as fairly uncontroversial and straightforward, so readers may be wondering why the Applicants sought a binding ruling? The fact is that the FIF rules are not straightforward to apply, overly complex, and the devil is in the detail. Getting these rules wrong can have significant and costly consequences for the taxpayer. Therefore, if you have any overseas investments, we recommend you talk to your usual Deloitte adviser to first determine if the FIF rules apply to you, and if they do, to ensure you are using the correct calculation methods. This is especially important as the Inland Revenue regularly takes part in the OECD’s Automatic Exchange of Information (AEOI) framework, in which participating jurisdictions collect and exchange financial account information concerning residents who invest or maintain assets in a country other than the one in which they are tax resident.

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