Measurement of cost – FIF rules

(Clauses 24 and 25)

Summary of proposed amendment

When the new foreign investment fund (FIF) rules were introduced, a temporary 5-year exemption was provided for investments in grey list companies with significant New Zealand shareholdings. Investments in Guinness Peat Group plc (GPG) qualified for this exemption. This exemption will expire from the beginning of the 2012−13 income year. This will mean that many shareholders in GPG will calculate tax under the FIF rules from 1 April 2012 using the fair dividend rate (FDR) method.

Because of the expiry of the exemption, a minor remedial amendment is required to define how “cost” is measured for the FIF rules.

The FIF rules do not apply to natural persons (or to certain trusts) if the cost of their FIF investments is equal to or less than $50,000. For the purposes of determining cost, section EX 68 of the Income Tax Act 2007 provides that a taxpayer can use half an investment’s 1 April 2007 value in place of its cost if it was purchased before 1 January 2000. This is because such an investment’s cost may not be readily available.

For investments to which the temporary 5-year exemption applied, this modification to “cost” is not appropriate. It may be difficult to obtain price data for long-held investments purchased after 1 January 2000.

Accordingly, it is proposed that a taxpayer be able to elect to treat the cost of an investment in a FIF as its market value at 1 April 2013 if that investment was previously covered by the 5-year temporary exemption and the investment was entered into before 1 January 2005. The investment’s market value, as opposed to half its market value (as in the existing rule), will be used because share prices are historically very low.

Application date

The amendment will apply from the beginning of the 2012−13 income year.