BIL move throws up tax anomaly

30 Jun, 2000 03:24 AM3 mins to read

By Denham Martin

Taxwise

I hold shares in Brierley Investments and understand that I may be taxed on capital gains under the Foreign Investment Fund regime. How does this regime operate?

A.B.

Auckland Assuming BIL ... transfers its head office to Singapore, what is the "cost" of acquiring the original investment under the comparative

Broadly speaking, the foreign investment fund (FIF) regime is designed to capture, for income tax purposes, the change in value of a New Zealand tax resident's investment in a foreign entity. In addition to foreign companies, the term "foreign entity" captures, for example, foreign superannuation schemes. Brierley almost certainly will become a "foreign entity" following its move to Singapore.

The FIF regime captures the change in value of an investment in a foreign entity as opposed to, for example, simply capturing dividend income. Hence, capital gains are caught. Therefore, a New Zealand tax resident owning shares in BIL may, in the future, be required to pay income tax in relation to that investment regardless of whether BIL pays a dividend in the relative income year.

Importantly, there are a number of exemptions to the FIF regime, the most significant for present purposes being that an investor does not fall within the FIF regime unless the aggregate cost of that investor's investments in foreign entities exceeds $20,000.

There are four methods of calculating the income or loss from a FIF. Under the comparative value method (being the most common method of calculation) a Brierley shareholder would be required to measure the change in market value of the shares held in the company between the start and end of an income year. In addition, adjustments are made for the cost of acquiring shares and any gains derived (for example, from the disposal of shares or from dividends).

Therefore, determining the acquisition cost under the FIF regime of shares in BIL will be important for two reasons. First, to determine whether a NZ tax resident is subject to the FIF regime and, secondly, to enable a comparative value method calculation to be made.

Unfortunately, while the act provides a number of criteria for determining the acquisition cost of an investment (covering such matters as multiple acquisitions/dispositions and bonus issues of shares), it does not directly address the situation of an investment held in a New Zealand entity that becomes a "foreign entity".

This anomaly in the FIF regime appears likely to be addressed by Parliament in the near future. Finance and Revenue Minister Sir William Birch has indicated that a law change is likely, confirming that the value of a shareholder's holding in BIL, for the purposes of the FIF regime, will be calculated at the date BIL migrates offshore.

Such a law change would be consistent with both the valuing of interests held by persons when the FIF regime was introduced and the valuing of interests held by persons who become NZ tax residents.

This proposed law change would have two important consequences. First, given the drop in BIL's share price, comparatively fewer BIL shareholders are likely to be made subject to the FIF regime. Those shareholders not falling under the FIF regime will still be liable to income tax on dividends. Secondly, shareholders will not be able to obtain a tax loss as a result of the drop in BIL's share price.

Finally, a taxpayer holding an interest in a FIF is required by law to disclose that interest to the Commissioner of Inland Revenue.

* Denham Martin is the principal of Denham Martin & Associates, lawyers specialising in advice on taxation and related matters.