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Inland Revenue

Tax Policy

Revaluing inherited former grey-list shares

(Clause 41)

Summary of proposed amendment

The Bill proposes re-valuing some foreign shares which were inherited prior to the introduction of inheritance rules in October 2005. Some investors claim that these shares have a nil or low cost. This means they qualify for the $50,000 “de minimis” exemption from the FIF rules, even though the market value of the shares at the time of the bequest may have been considerably higher than $50,000. It is not appropriate that these shares continue to be exempt from tax.

Application date

The revaluation of these shares will occur on the date the Bill is enacted.

Key features

It is proposed that a new section EX 67B will apply to shares in FIFs that were inherited at zero cost or at the cost of the person that made the bequest. It will only apply if the FIF was a grey list company at the time the shares were inherited and if the shares were inherited prior to 1 April 2007 (when the grey list exemption was abolished for portfolio shares). These shares will be subject to a deemed sale and reacquisition at market value on the date that the Bill is enacted.

The consequences of this deemed sale and reacquisition would be:

  • a taxable capital gain if the interest is held on revenue account; and
  • entry into the normal FIF attribution rules unless the total cost of FIF interests (including the newly determined market value of the re-valued interests) is less than $50,000, or some other exemption (e.g. sections EX 31-39) applies.

Any resulting tax liabilities will be able to be spread over 3 years, with at least one third paid in the first year, one half of the remaining tax paid in the second year, and the rest in the third year after the year the disposal takes effect.


Under the FIF rules, if a person has attributing FIF interests that cost less than $50,000, that person has no attributed FIF income (paragraphs CQ 5(1)(d) and (e)).

If a person inherits shares, then the cost base of those shares is their market value at the time of transfer or, if certain other conditions are met, their original cost to the transferer (see subpart FC which primarily relates to transfers to close relatives).

However, the inheritance rules in subpart FC are a relatively recent development, applying from 1 October 2005. Prior to the existence of these rules, it was often argued that inherited assets had a cost base of nil. A cost base of nil could have persisted until there was another transfer of the shares.

The problem relates mainly to inherited interests in FIFs from former “grey list” countries; most other FIF interests would have a market-value cost base following inheritance.

There are some existing provisions to force a cost based on market value for attributing interests in a FIF, if those interests were not acquired for market value see (sections EX 67 and GC 4). However these provisions did not apply to interests that were grey list FIF interests at the time of transfer, because such interests were not attributing interests in a FIF.

It is not an appropriate outcome that people who inherited shares prior to the abolition of the grey list should continue to be carved out of the FIF rules indefinitely. The grey list is supposed to have been repealed for portfolio FIF interests.