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Inland Revenue

Tax Policy

Portfolio class land loss

(Clauses 19 and 20)

Summary of proposed amendment

An amendment is being made to the definition of “portfolio class land loss”. This will clarify that portfolio investment entities (PIEs) that own land offshore can allocate tax losses arising from foreign exchange contracts to investors.

Application date

The amendment to section HL 32 will apply from 1 October 2007, the date the PIE rules were introduced.

The amendment to section HM 65 will apply from 1 April 2010, the date the rewritten PIE rules apply from.

Key features

Amendments to section HL 32, and to rewritten section HM 65 of the Income Tax Act 2007 change the definition of “portfolio land class loss” to clarify that land-owning portfolio investment entities (PIEs) that invest offshore can allocate tax losses that arise from foreign exchange contracts to their investors. This is consistent with the policy intent of the PIE rules when they were enacted.


At the end of the year, a PIE usually receives a cash rebate from Inland Revenue for any tax losses it has made, which it then allocates to its investors. However, PIEs that invest predominantly in land or land-owning companies (“land PIEs”) cannot receive a cash rebate for their tax losses at the end of the year. Instead, when a land PIE makes a tax loss on its investments it carries the loss forward to offset income in future years. This is to prevent excessive tax losses arising from heavily geared land investments.

Under the current rules, a problem arises for land PIEs with portfolio investments in foreign land-owning companies. As these investments are often denominated in foreign currency, these PIEs typically enter into foreign exchange hedging contracts to remove or reduce the currency risk associated with the investment. These hedging contracts result in a loss if the foreign currency in which the investment is held appreciates against the New Zealand dollar. Under the current rules, the PIE must carry forward these losses that arise as a result of the hedging contract rather than allocate the losses to its investors.

The PIE’s investment in the foreign land-owning company is generally subject to fair dividend rate (FDR) taxation at 5% and always generates income for tax purposes. In some years, the land PIE’s FDR income will not be sufficient to offset the foreign exchange loss and an overall tax loss may arise. Under current legislation, a land PIE will be required to carry this loss forward. This is the wrong policy outcome because the loss arises from the foreign exchange hedging contract. The loss does not arise from the underlying land investment. The proposal provides that foreign exchange losses associated with portfolio investments in foreign land-owning companies are allocated to investors as they arise.