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DV 4B: Carry forward of expenditure by member funds investing in portfolio investment entities
or “Carrying forward extra expenses for member funds investing in special investment funds”
You could also call this:

“Transferring expenses from investment funds to master funds”

You can transfer your expenses to a master fund if you’re a group investment fund with category A income, a public unit trust, or a superannuation fund. This applies when you invest some or all of your money in a master fund and have certain expenses during that time. The expenses you can transfer are ones you’re allowed to deduct, including some financial arrangements in New Zealand dollars. You can’t transfer expenses for other financial arrangements or revenue account property.

To transfer your expenses, you need to agree with the master fund. You can only transfer expenses up to the amount of your tax loss for that year. If you’re a group investment fund with category A income, you can only transfer expenses related to that income.

If you stop investing in the master fund during a year, neither you nor the master fund can deduct the transferable expenses. You have to treat these expenses as a loss balance.

The master fund can deduct the expenses you transfer to it in the year you make the transfer. There are some limits on this. If the master fund is a group investment fund with category A income, it can only deduct expenses from that income. There’s also a formula in section DV 6 that limits how much the master fund can deduct.

If the master fund is a multi-rate PIE, it can deduct the expenses you transfer, but only up to your share of the PIE’s taxable income for that year.

If the master fund can deduct more than it did in its tax return, the Commissioner might let you transfer more expenses later.

When the master fund deducts the expenses, it’s treated as if you didn’t have those expenses.

This section adds to the general permission for deductions and overrides the capital limitation, but the other general limitations still apply. It also overrides the general permission in some cases.

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Next up: DV 6: Formula for calculating maximum deduction

or “How to calculate the maximum tax deduction for a master fund”
Next

Part D Deductions
Expenditure specific to certain entities

DV 5Investment funds: transfer of expenditure to master funds

  1. This section applies when—

  2. a group investment fund that derives category A income, a public unit trust, or a superannuation fund (the member fund) invests some or all of its funds in a master fund; and
    1. while the member fund has funds invested in the master fund, the member fund incurs expenditure of a kind described in subsection (2); and
      1. the member fund has some or all of its funds invested in the master fund throughout the period starting at the time at which the member fund incurs the expenditure and ending with the close of the last day of the income year in which the expenditure is deducted by the master fund under this section.

        1. The expenditure is expenditure for which the member fund is allowed a deduction,—

        2. including expenditure on a financial arrangement that is denominated in New Zealand dollars and for which expenditure is allocated using the yield to maturity method set out in subpart EW (Financial arrangements rules); and
          1. not including—
            1. expenditure on any other financial arrangement; or
              1. expenditure on revenue account property.

              2. The expenditure incurred by the member fund may be transferred to the master fund, subject to the following conditions:

              3. the member fund and the master fund must agree to the transfer of the expenditure; and
                1. the member fund may transfer expenditure only to the extent to which it has a tax loss in the corresponding tax year, with the tax loss calculated as if this section did not exist; and
                  1. a member fund that is a group investment fund that derives category A income may transfer only expenditure that relates to the category A income.

                    1. In an income year in which the member fund stops investing in the master fund,—

                    2. neither the master fund nor the member fund is allowed a deduction for expenditure that would otherwise be transferable; and
                      1. the member fund must treat the expenditure as a loss balance.

                        1. The expenditure referred to in subsection (3) is treated as being incurred by the master fund in the income year in which it is transferred by the member fund.

                        2. The master fund is allowed a deduction for the expenditure, subject to the following conditions:

                        3. a master fund that is a group investment fund that derives category A income may deduct expenditure only from its category A income; and
                          1. the amount of the deduction is limited by subsection (7).

                            1. The formula in section DV 6 is used to calculate the maximum deduction that the master fund is allowed for expenditure of the member fund treated as being incurred by the master fund.

                            2. Despite subsection (7), a master fund that is a multi-rate PIE is allowed a deduction for expenditure transferred to it by a member fund. However, the maximum amount transferred must be no more than the member fund's share of the taxable income of the PIE for the income year in which the amount is transferred, any excess being treated as not transferred.

                            3. If, after the date on which the master fund has filed its return of income, the master fund is able to deduct more than the amount actually deducted, the Commissioner may allow the member fund to transfer expenditure to the extent of the difference after the return of income has been filed.

                            4. The expenditure for which the master fund is allowed a deduction is treated as not being incurred by the member fund.

                            5. The link between this section and subpart DA (General rules) is as follows:

                            6. subsection (6) supplements the general permission and overrides the capital limitation; the other general limitations still apply:
                              1. subsection (9) overrides the general permission.

                                Compare
                                Notes
                                • Section DV 5(7B) heading: substituted, on (applying for the 2010–11 and later income years), by section 105(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                • Section DV 5(7B): substituted, on (applying for the 2010–11 and later income years), by section 105(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                • Section DV 5 list of defined terms investor interest: repealed (with effect on 1 April 2010), on , by section 44 of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).
                                • Section DV 5 list of defined terms multi-rate PIE: inserted, on , by section 105(4)(b) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                • Section DV 5 list of defined terms portfolio investor interest: repealed, on , by section 105(4)(a) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                • Section DV 5 list of defined terms portfolio tax rate entity: repealed, on , by section 105(4)(a) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).