METHODS TO CALCULATE FOREIGN INCOME FUND INCOME (FIF INCOME)
FIF INCOME CALCULATION
This article specifically relates to the methods of calculation for FIF income calculation. For detailed explanation of FIF income, please refer to our article on ‘Foreign Investment Fund rules’.
IRD allows for calculation of the income through five different methods, the selection of which comes down to various factors such as availability of information, market prices etc. A method selected for a financial year must be applied uniformly across all investments in that year.
METHOD 1 – FAIR DIVIDEND RATE (FDR) METHOD.
This method allows for the income to be calculated at 5% of the market value of the investments, regardless of the price variation over the year. This method is favourable when there is significant growth in the share prices or new investments have been acquired during the year. Any sale of investments are to be assessed for profits made on the average acquisition cost, however the ‘quick sale adjustment’ allows for such profits to be capped at 5% of purchase prices.
METHOD 2 – COMPARATIVE VALUE
With this method, the income is calculated as the net benefit or growth of value in the investments, calculated as closing value plus income such as dividends, less opening value and any cost of purchase or foreign income tax paid on the income. This method is favourable when the market value of the held assets has dropped, as the gains can be capped at $0, versus the 5% on the opening value as with the FDR method.
The above two are the most commonly used calculations as the market prices and investment purchases are fairly easy to obtain. If the market value of the shares are unavailable, the above methods cannot be used. If the taxpayer’s interest in the FIF is more than 10%, FIF rules cease to apply and instead, CFC rules apply.
You cannot claim a loss as any loss is treated as $0 income.
Other methods that can be used include the ‘Deemed rate of Dividend’ method where the deemed rate of return published by the Governor General is used instead of 5% with FDDR, and Attributable FIF Income method, which can be used only under specific instances where the taxpayer has an interest in the FIF between 10-50% and 5% or more of the FIF are passive income (royalties, rent, interest etc).
As for currency conversion, you may use the actual rate of transaction, rolling 12m average or med-month actual rate as detailed by the FIF guide.
*The above article is a high-level explanation of the methods of calculation, and there may be other technicalities/rules that are applicable. The complexity of the calculations can also vary. Please reach out to us if you have specific questions regarding your situation.
Please note that the above does not constitute specific tax advice and only intends to be a general advice. If you require specific advice related to your situation, please reach out to our tax consultant using the ‘contact us’ option.
Contact Tax Accountant
Please fill the form below to contact us!