A revised PUB00443 Foreign investment fund (FIF) calculation methods in cases of non-compliance has been released for public consultation indicating a positive turnaround for taxpayers.

Issue

Does a person have a choice of methods for calculating FIF income when they make a voluntary disclosure or file a late return? 

When Inland Revenue (IR) first posed this question in a December 2022 draft item, the answer was no. Following advocacy efforts by the CA ANZ Tax Team, and the consideration of submissions received, the IR now accepts that taxpayers do have a choice of methods when they make a voluntary disclosure or file a late return.  

We consider this to be the correct outcome as it aligns with the policy settings of the FIF calculation rules and promotes voluntary compliance. 

Scope 

The draft item focuses on a FIF interest where:

• the taxpayer is a natural person or eligible trustee
• they own ordinary shares in a foreign company
• a market value is available for the shares
• the company is not in an ASX-listed Australian company
• the shareholding is under 10%
• the total cost of all FIF investments is over NZ$50,000, and
• the choice of method is between the fair dividend rate (FDR) and comparative value (CV).

Broadly, FIF income is calculated under the FDR method by multiplying the opening market value of the shares by 5% and adding a ‘quick sale’ adjustment if shares have been bought and sold in the same year.  Dividends received are not taxable under the FDR method.  In comparison, the CV method calculates FIF income by comparing the closing market value of the shares with their opening value, adjusted for share purchases and dividends received.  The CV method may result in FIF income or a FIF loss.

Generally, a taxpayer who is a natural person or trustee can choose the lower of the amount of FIF income calculated under FDR or CV by including the calculated FIF income in their tax return.

Scenarios

Three specific scenarios are considered in the revised draft item:

1. The taxpayer fails to declare FIF income in a tax return and later makes a voluntary disclosure.
2. The taxpayer fails to file a tax return by the due date and later provides one with FIF income.
3. The taxpayer fails to file a tax return and the Commissioner of Inland Revenue issues a default assessment.

Under scenarios 1 and 2, the draft item confirms that the taxpayer can still choose between the FDR and CV methods (subject to the usual restrictions on choice).

Under scenario 3, IR will calculate FIF income using the FDR method if it is practical to use it, or the cost method if not.  The CV method will not be available.  If the taxpayer wishes to object to the default assessment, they will first be required to file the tax return in question.  The taxpayer may choose to use either FDR or CV to calculate the FIF income in this return (subject to the usual restrictions on choice).

The draft item includes five helpful examples.  The first four examples are a variation of a base set of facts.  The fifth example considers a default assessment situation.

Submissions on the draft item close on 7 December 2023.