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What is the Opening value of FIF income calculation for Transitional Tax Resident

In highly technical tax area on foreign investment fund regime (FIF) Technical discussion summary was discussed in TDS 26/01. Basically, this was a private ruling by a taxpayer but this lay good ground rules in understanding FIF opening value parameters for transitional tax resident. 

This technical decision summary is about the private ruling of a taxpayer whose transitional residence period has ended considering the opening value for the fair dividend method for calculating the foreign investment fund income. 

Opening value was critically analysed in the case. Below are key discussion points which untangle this complex issue. 

Opening value FIF under s EX 52 

  • According to section CQ 5 of the income tax act 2007, “A person has FIF income in an income year if, during that time, if the rights are of attributing interest in FIF under section EX 29. 

    • Under s EX 41(2) a person’s rights for a FIF are not of attributing interest if at the same time, that person is a non-resident or a transitional resident.

      • This means that the person does not have FIF income, because they do not have attributing interest as they are a transitional resident.

  • Under TDS 26/01(9) the person needs to calculate their FIF income once they are no longer a transitional resident, and will use the fair dividend rate annual method under s EX 52.

    • Formula under s EX 52(3):

      • (0.05 x opening value) + quick sale adjustment.

  • EX 52(5), the definition of opening value in the formula “the total of the market values of the FDR interests held by the person at the start of the income year.”

  • TDS (12) The “start of the income year” in this case was referred to 1 January 2025 as the income year ending was 31 December 2025. This means that to determine whether the applicant has a positive opening value, they would have needed to meet the requirements for attributing FIF interest at the start of the income year.

  • Under s EX64 (4) a person can acquire FIF interest “immediately after the change of residence or status” and “not holding it when the person is a transitional resident or not a New Zealand resident, unless they had previously ceased to being a resident”

  • According to section 54 of the legislation act 2019, a period that starts or starts after a day or an event, the period will not include the day or event. 

  • TDS (15) states that the rule above can be overridden as in the context of s EX64 (4), the word “immediately” suggests that the legislation act 2019 can be overridden.

  • s HR 8(3) states that period of transitional residence ends on the earliest of:

    • day they nominate

    • day before the person stops being a New Zealand resident

    • Last day of the 48th month after the month in which the non-residence period ends. 

      • The relevant date in this case, was the last day of the 48th month as they acquired a permanent place of residence in New Zealand, 31 December 2024, TDS (16)

  • TDS (18) the resident’s ceased to be a transitional resident on 31 December 2024, and became a resident on the 1st of January 2025

  • TDS (19) Sine they became a resident after the start of the income year, they will have no FIF interest at the start of the income year.

  • In this particular case, a non standard filing date was discussed to file the income tax return on 31 December 2024.

Tax avoidance

  • s BG 1(1) states that the tax avoidance arrangement is void against the commissioner for income tax purposes.

    • Under s BG 1(2) the commissioner can adjust a person’s taxable income affected by the arrangement however the commissioner seems appropriate, to prevent any tax advantages from the arrangement. 

  • TDS (22), the Tax Counsel Office (TCO) took the following steps in this case:

    • Understand the arrangement in its legal form.

    • Determine if the arrangement has any tax avoidance purposes or effects from:

      • Figuring out the parliament’s reason for certain provisions for the arrangement.

      • Interpret the commercial and economic effects of the arrangement.

      • Identify the implications of the past steps and answering the question of “does the arrangement, when viewed in a commercially and economically realistic way, make use of or circumvent the specific provisions in a manner consistent with parliament’s purpose?”

    • Determine if the arrangement’s sole purpose or effect is to avoid tax, if not consider the merely incidental test.

  • The TCO had concluded with the following:

    • The arrangement and its tax effects:

      • In its legal form the arrangement is the holding of FIF interest as of the end of 31 December 2024. 

      • The following tax effects were the effect of the arrangement:

        • Applicant returns their income using a 31 December non-standard balance date.

        • Applicant has no FIF income due to the transitional resident rule in the income year end 31 December 2024.

        • Applicant will have no opening value for the fair dividend rate annual method in the year ending 31 December 2025.

        • Applicant will only have FIF income from the FDR annual method in the year ending 31 December 2025 from quick sales adjustment. 

    • Parliament’s purpose:

      • TDS (26) the parliament’s purpose of the transitional residence rules is to remove the barriers that inhibit international recruitment to New Zealand 

      • TDS (27) the parliament’s purpose of the FIF calculation methods is to devise and impose a rational measure of tax on foreign investments. 

      • TDS (28) the commissioner is able to approve a taxpayer’s request for a non-standard balance date for filing income tax returns at their discretion (s 38 Tax Administration Act 1994).  However, the commissioner will not approve any changes with the intent to defer any tax payments or take advantage of tax incentives or concession or having no direct involvement with business activities while having investment income.

    • Commercial and economic reality of the arrangement:

      • The TCO determined the following commercial and economic realities:

        • Applicant had owned FIF interests at the end of 31 December 2024.

        • The arrangement does not seem to be contrivance or has artificiality.

          • The commissioner had approved the change of balance date because of the complex portfolio of business interests and investments and would have high compliance costs in adjusting for a 31 March balance date. 

          • The applicant’s transitional residence had ended lawfully and no suggestion of the applicant timing the ending period to be at the end of the income year.

          • Commercially, the applicant had not handled FIF interests in any contrived or unusual way. 

    • Does the arrangement make specific provisions in a manner consistent with Parliament’s purpose?

      • The TCO considered that the arrangement lines up with the parliament’s purpose.

      • The rules of transitional residence had given a specific exemption from the FIF rules. The applicant didn’t have a FIF interest when they were a transitional resident. 

        • The FDR annual calculation method had proved that there was no FIF income in the year that a taxpayer acquires a FIF interest (not considering quick sale adjustment)

        • By using the start of the income year as the measurement date, it creates a boundary line which can make outcomes seem arbitrary. 

        • The parliament will likely consider the arrangement in a way that makes use of the relevant provisions in a way that aligns with the parliament’s purpose.

        • TDS (33) the TCO had concluded that the arrangement doesn’t have the purpose or effect of tax avoidance. 

New Zealand Tax Accountant.