Analysis of Foreign Investment Funds (FIF) for Opera Trust in NZ

This assignment analyzes the New Zealand taxation implications for Opera Trust, specifically focusing on Foreign Investment Funds (FIFs). The solution defines FIFs based on the type of investments, including foreign companies, unit trusts, and superannuation schemes. It details the concept of attributing interest and its impact on taxation, including the 10% threshold for exemptions. The assignment covers FIF income, the NZ$50,000 threshold, and the Fair Dividend Rate (FDR) method. It also explains the Quick Sale Adjustment (QSA) rule for capital gains. The case study applies these rules to Opera Trust's investments, demonstrating how to calculate taxable income and exemptions based on the provided financial data, including dividends from ASX listed companies and losses from share transactions. The solution includes an analysis of the provided data in the attached Excel spreadsheet and explains the tax liabilities and exemptions applicable to Opera Trust under the FIF rules.

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New Zealand Taxation
Defining a Foreign Investment Fund (FIF)
Any investments made into the following type of organisations by Opera Trust will be
classified as Foreign Investment Funds.
o A foreign company.
o A foreign unit trust
o A foreign superannuation scheme
(this is applicable only on schemes floated before 1 April 2014)
o FIF superannuation interest
(implemented from 1 April 2014 onwards)
Attributing Interest
This is the proportion of the investments held overseas by Opera Trust. Attributing
interest includes:
o A direct income interest in any foreign company or unit trust comprising of
shares in any foreign company except ASX listed companies
units in any foreign unit trust except ASX listed Australian trusts
In case the attributing interest proportion of Opera Trust is less than 10%, then all
income is exempted from tax in New Zealand.
Foreign Investment Fund Income
The investments made by Opera Trust have an attributing interest in a FIF and even if
the income or capital gain, made by Opera Trust is not paid in an NZ account of the
trust, it is still a reportable FIF income to be reported to IRS by Opera Trust (See Chart).
The NZ$50,000 threshold
IRS has also fixed a threshold of NZ$50,000 to reduce compliance costs for investors
who have made small investments offshore. This threshold is also applicable on Opera
Trust as it is an eligible NZ resident trust and has a reportable FIF income because of an
attributing interest in a FIF. Opera Trust is exempt from paying tax on the dividends
earned in the income year from ASX listed companies.

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Fair Dividend Rate (FDR)
In case the FIF investments of Opera Trust had not qualified for the threshold limit (see
chart), then it would have paid tax at a maximum Fair Dividend Rate (FDR) of 5% on
the opening market value, each year, of the FIF investments. Under this condition, the
Total Gain is taken as increase in value, between the opening and closing balances of
the share and the dividend earned during the year on the share.
Quick Sale Adjustment (QSA)
In case Opera Trust buys and sells shares in the same income year (between 1 April and
31 March), then a tax liability will ensue on the capital gains made, subject to the
amount of the capital gains which is lowest of –
(a) 5% of the cost of the quick sale shares or
(b) The actual gain derived from the sale.
However, no tax is payable if there is a loss from the sale.
Case Study: Opera Trust
(a) As explained above, since the attributing interest proportion of Opera Trust in
FIF is less than 10%, and the FIF investments are below the threshold limit of
NZ$50,000 (See Attached Excel Spreadsheet), all its income (including the NET
GAIN of $450.00 made from shares held in FIF) is exempted from tax in New
Zealand. Moreover, the dividend earned of NZ$850.00 from the shares held in
FIF are also not taxable by IRS as the dividends earned from FIF are not taxed
separately.
(b) Opera Trust bought and sold some shares of the UK Company, but there is a loss
of NZ$2,000 (See Attached Excel Spreadsheet) from the transaction, hence no
tax liability will occur under the Quick Sales Adjustment rule as explained
above.

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ANNEXURE – A
Chart Showing Foreign Investment Fund Limits for NZ Resident Taxpayer and
Taxation Limits
Source: IRS, NZ.

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