This week Inland Revenue released official’s issues paper, “Effect of the FIF rules on immigration: proposals for amendments”.
Inland Revenue acknowledges the impact of the foreign investment fund (‘FIF’) rules on migrants and prospective migrants, and also the uniqueness of the FIF regime. Not many other countries, if any, tax foreign investments on an unrealized basis as occurs under this tax.
Of note is that folks who qualify for New Zealand’s temporary tax exemption for the first years of landing here in Aotearoa, are not subject to these rules during the exemption period.
Background on FIF rules
Effective from 1 April 2007, New Zealand residents with three types of foreign investments are required to calculate income using the FIF rules[1]. These changes came bundled as part of the reform of New Zealand’s international tax regime at the time.
So, these rules have been in effect for almost two decades and the rules are complex – even for tax practitioners.
The three categories of foreign investment are:
- Direct interests in foreign companies of 10% or less (‘Category 1 FIF’).
- Rights to benefit from a foreign superannuation scheme (‘Category 2 FIF’).
- Rights to benefit from a foreign life insurance policy (‘Category 3 FIF’).
Unless an exemption from the FIF rules applies, a New Zealand tax resident has an attributing interest in a FIF and must use the FIF rules to calculate FIF income.
An example is as follows:
A, a U.S. citizen, holds shares in Apple, a U.S. corporation. A is not a transitional resident nor does A hold more than 10% of the entire shares in Apple.
The shares in Apple are attributing interests in a FIF. A must use one of the prescribed methods to calculate FIF income. A can use one of two methods: the comparative value (‘CV’) method, or the fair dividend rate (‘FDR’) method to calculate FIF income for inclusion in a New Zealand tax return.
A can choose the method that yields the lower taxable income of the CV or FDR method, however A must apply the same method consistently across all FIF assets for each income year.
Inland Revenue’s consultation document discusses the impact of the FIF rules on migrants, and examines alternatives to mitigate the discouragement that occurs from these rules.
Foreign Superannuation Fund carve-out from FIF rules
Pursuant to the introduction of the FIF rules there were further changes, and foreign superannuation funds are usually taxable on a cash receipts basis.
These changes were enacted in 2013. From that year, only taxpayers who had applied the FIF rules to their foreign superannuation fund and filed a New Zealand income tax return by 20 May 2013 could continue to use the FIF rules for that fund.
All other residents are required to use the cash receipts basis, which requires that distributions are taxed upon withdrawal only.
[1] Subpart EX of the Income Tax Act 2007
