Investing in Australian Unit Trusts: A Guide for New Zealand Residents

Introduction

For people living in New Zealand, investing in Australian Unit Trusts (AUTs) has grown in popularity, especially for those who are interested in public-private partnerships and other large-scale infrastructure projects. But in order to make wise investing choices, one must comprehend the tax ramifications. This article simplifies the complicated issues by breaking down recent changes to the tax laws affecting New Zealanders who invest in AUTs.

Australian Unit Trusts (AUTs)

In Australia, Australian Unit Trusts (AUTs) are popular investment vehicles, particularly for major infrastructure projects. While AUTs are regarded as companies in New Zealand, they are classed as trusts under Australian tax law. Depending on how many units they own, beneficiaries or unit holders have fixed rights to the trust's income.

Important Tax Changes for Investors in New Zealand

Significant changes have been implemented for citizens of New Zealand who invest in AUTs due to recent revisions made to the Income Tax Act 2007. The purpose of these adjustments is to make tax computations easier and avoid economic double taxation.

Method of Fair Dividend Rate (FDR) for Investors

The Fair Dividend Rate (FDR) technique can now be used by New Zealand investors holding 10% or more of an AUT to determine their attributable foreign investment fund (FIF) income. To make tax calculations easier, the FDR technique assumes that 5% of the investment's initial value is taxable income.

Avoiding Tax Duplication

If income has previously been taxed in New Zealand under the FIF regulations, it will no longer be taxed in relation to certain attributing interests in a FIF or a controlled foreign company (CFC). With this modification, residents of New Zealand will not pay taxes on the same income twice.

Comprehending FIF and CFC Regulations

Residents of New Zealand who own interests in foreign funds, including AUTs, are subject to the FIF regulations. The purpose of these regulations is to stop citizens of New Zealand from dodging New Zealand tax on overseas investments. Conversely, investments where five or fewer New Zealand residents own 50% or more of a foreign company's shares are targeted by the CFC restrictions. These regulations make sure that CFC-related passive income is taxed as it is earned.

Important Changes in Specifics

Applying the FDR Approach

Before, a provision in the rules prevented New Zealand investors with sizable holdings in AUTs from applying the FDR approach. The FDR approach may be applied retroactively by these investors for income years beginning on or after July 1, 2014, according to the latest revisions. For investors who have utilised the FDR approach since then, this modification maintains their tax positions. 

Preventing Double Taxation

The changes also include some dividends from assigning interests in a FIF to the list of distributions from AUTs that are treated as excluded income. By making this adjustment, the same income cannot be taxed twice: once as distributions from the AUT and once as ascribed FIF revenue.

Modifications to CFC Regulations

Any payouts from an AUT FIF to the CFC may result in double taxation if an investor from New Zealand owns an AUT that is a CFC. The most recent modifications guarantee that, as long as the FIF income has previously been duly taxed, such distributions are not subject to further CFC regulations. Fairness is ensured and over taxation is avoided by this modification.

Effective Dates

The modifications that made the FDR approach possible to apply were operative on July 1, 2014. On April 1, 2023, amendments to avoid double taxation went into effect.

Summary

Residents of New Zealand have a lot of chances when investing in Australian unit trusts, but in order to optimise returns and minimise risks, it's critical to comprehend the tax regulations. Investors' ability to manage their AUT investments is facilitated by the latest revisions, which avoid double taxation and offer transparency. Investors can make sure their investments are taxed effectively and equitably by employing the FDR technique and comprehending how the FIF and CFC regulations interact.