PIE remedials

Issue: FIF management fee rebates

Submission

(Deloitte)

The legislation should be amended so that a person is not taxed on rebates of fees they have derived in relation to an interest in a FIF where the person has not been allowed a deduction for the payment of the fees, irrespective of the source of the rebate of fees. As the amendment would simply align the legislation with existing policy, it should have an effective date of 1 April 2009, when the relevant rule was introduced.

Comment

Section EX 59(2) treats a person with an interest in a FIF as having no income from the interest for a period other than FIF income. Section EX 59(2B) contains an exception where the amount derived by a person from an interest in a FIF is a rebate of fees and the person was allowed a deduction for the payment of the fees.

Where a PIE invests in a FIF and calculates its FIF income using the fair dividend rate method, the PIE will be taxed on management fee rebates received from an investment manager engaged by the FIF, but the management fees are not deductible to the PIE because they are incurred by the FIF, not by the PIE.

As the submitter notes, the policy intent behind the insertion in 2009 of section EX 59(2B) was to ensure tax symmetry with regards to management fees and any related rebates for a FIF investment. Officials therefore consider that in the situation described above, where the PIE has not taken a deduction for the payment of the fees, they should not be taxed on a rebate of those fees, irrespective of the source of that rebate of fees.

Officials also agree with the submitter that any amendment should exclude persons who use the comparative value method for calculating their FIF income, as a full deduction for management fees charged to the FIF is effectively achieved where this method is used.

Because the amendment proposed is a clarification in relation to section EX 59(2B), officials agree that it should be effective from 1 April 2009, with application for the 2009–10 and later income years (i.e., in line with the amendment that inserted section EX 59(2B). The retrospective application should be at the taxpayer’s discretion.

Recommendation

That the submission be accepted.

Issue: Definition of “percentage” in a formula

Submission

(Matter raised by officials)

The definition of “percentage” in the formula used by a PIE for calculating amounts attributed to investors should be changed to ensure that it accommodates term funds with a fixed unit value.

Comment

Section HM 36(2) contains a formula which a multi-rate PIE uses to calculate the PIE income (or loss) attributable to each investor.

The formula in section HM 36(2) contains the item “percentage”, which, as defined in section HM 36(3)(a), “is the percentage of the investor’s entitlement to a distribution by the PIE to the investor class”.

In the case of term funds with a fixed unit value (e.g., $1), where investors enter the fund at different times, but for the same price. This is because it is unclear whether the “investor’s entitlement to a distribution” referred to is the entitlement that accrues for the period on any given day, or is the total amount that would be distributed to the investor if a distribution was made on that day (and thus would not reflect their pro rata interest in the fund).

The uncertainty could be resolved by amending the definition of “percentage” in the formula to ensure that term funds with a fixed unit value are accommodated.

As this amendment would ensure that the legislation reflects the existing policy position, application for the 2010–11 and later income years is considered appropriate.

Recommendation

That the submission be accepted, and that this change apply for the 2010–11 and later income years.