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Income Tax Act 2007

Timing and quantifying rules - Hedging of currency movements in Australian non-attributing shares and attributing FDR method interests

EM 5: Fair dividend rate hedge portions: hedge-by-hedge methods

You could also call this:

“Calculating hedge portions for foreign investments using two different methods”

This section explains how to calculate the maximum or minimum fair dividend rate hedge portions for eligible hedges. You can use this calculation when you first enter into or acquire a hedge.

You can choose between two methods to calculate the hedge portions:

  1. The first method uses a formula that considers eligible currency assets, proxied currency assets, and existing hedge amounts.

  2. The second method uses a formula that considers the total value of eligible assets, existing hedge amounts, and the amount of the current hedge.

For both methods, if the calculated amount is less than zero, the maximum or minimum fair dividend rate hedge portion is zero.

The calculation takes into account various factors such as the market value of your assets, the currencies involved, and any existing hedges you have.

You must use the same method for all your eligible hedges. You can’t mix and match methods for different hedges.

If you’re dealing with a hedge of a hedge, there are special rules for calculating the apportioned current hedge amount.

Section EM 7 overrides the rules in this section.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM5502532.

Topics:
Money and consumer rights > Taxes
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EM 4: Elections, or

“Choosing special tax rules for managing eligible hedges”

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EM 5B: Fair dividend rate hedge portions: portfolio method, or

“How to calculate hedge portions for foreign investments using the portfolio method”

Part E Timing and quantifying rules
Hedging of currency movements in Australian non-attributing shares and attributing FDR method interests

EM 5Fair dividend rate hedge portions: hedge-by-hedge methods

  1. This section calculates the maximum fair dividend rate hedge portions for a person’s eligible hedges on a hedge-by-hedge basis under an election provided by section EM 4, or the minimum fair dividend rate hedge portions for hedges that are a hedge of a hedge.

  2. Repealed

  3. A person may choose to use either the method in subsections (4) and (5), or the method in subsections (9) to (10D), to calculate the maximum or minimum, as the case may be, fair dividend rate hedge portions for all of the person’s eligible hedges when the relevant hedge is first entered into or acquired. They may not choose to use, for example, the method in subsections (4) and (5) for some hedges and the method in subsections (9) to (10D) for other hedges.

  4. The maximum or minimum, as the case may be, fair dividend rate hedge portion for a person's eligible hedge (the calculation hedge) is the lesser of 100% and the amount, expressed as a percentage, calculated, using the formula in this subsection, when the hedge is first entered into or acquired. Subsection (8) overrides this subsection. The formula is—

    (1.05 × (eligible currency assets + proxied currency assets) − FDR hedges amount) ÷ calculation hedge amount.

    Where:

    • In the formula in subsection (4), all items are expressed in the calculation currency (see: eligible currency assets), and—

    • eligible currency assets is the total market value of,—
      1. a person’s assets described in section EM 1(1)(a) and (b) that are denominated in the same currency (the calculation currency) that the calculation hedge hedges; and
        1. if the person chooses and is a qualifying hedge fund, their interests in assets that are owned by a multi-rate PIE, described in section EM 1(1)(a) and (b), and denominated in the calculation currency:
        2. proxied currency assets is,—
          1. unless subparagraph (ii) or (iii) applies, the total market value of a person's assets described in section EM 1(1)(a) and (b) that are denominated in a currency (the proxied currency) other than the calculation currency, if an eligible hedge that is denominated in the calculation currency acts like hedging for the assets due to a relationship between exchange rate movements in the proxied currency and the calculation currency:
            1. zero, if the person has hedges denominated in the proxied currency:
              1. zero, if the person has a hedge, denominated in a currency other than the proxied currency or the calculation currency, that acts like hedging for the assets due to a relationship between exchange rate movements in the proxied currency and that other currency:
              2. FDR hedges amount is the amount of calculation currency hedged by a person’s fair dividend rate hedge portions, but excluding the portion for the calculation hedge:
                1. calculation hedge amount is the amount of foreign currency that is hedged by the calculation hedge.

                  1. Repealed

                  2. Repealed

                  3. If the amount calculated under subsection (4) or (9) is less than zero, then the maximum or minimum, as the case may be, fair dividend rate hedge portion for the relevant calculation hedge is zero.

                  4. The maximum or minimum, as the case may be, fair dividend rate hedge portion for a person’s eligible hedge (the calculation hedge) is the amount, expressed as a percentage, calculated using the following formula when the hedge is first entered into or acquired:

                    FDR gross amount × apportioned current hedge amount ÷ calculation hedge amount.

                    Where:

                    • In the formula in subsection (9), all items are expressed in New Zealand currency, and—

                    • FDR gross amount is the amount given by subsection (10B):
                      1. apportioned current hedge amount is the amount given by subsection (10D):
                        1. calculation hedge amount is the amount of foreign currency that is hedged by the calculation hedge.

                          1. For the purposes of subsection (10), the FDR gross amount is either—

                          2. zero if the formula in this subsection does not calculate, when the hedge is first entered into or acquired, an amount; or
                            1. the lesser of 1 and the amount calculated using the following formula when the hedge is first entered into or acquired:

                              1. In the formula in subsection (10B)(b), all items are expressed in New Zealand currency, and—

                              2. eligible currency assets is the total market value of a person’s assets described in section EM 1(1)(a) and (b) and, if the person chooses and is a qualifying hedge fund, their interests in assets that are owned by the relevant multi-rate PIE and described in section EM 1(1)(a) and (b):
                                1. FDR hedges amount is the amount of foreign currency hedged by a person’s fair dividend rate hedge portions, but excluding the portion for the calculation hedge:
                                  1. apportioned current hedge amount is the amount given by subsection (10D).

                                    1. The apportioned current hedge amount for the purposes of subsections (10) and (10C) is 1 of the following amounts, expressed in New Zealand currency:

                                    2. if the calculation hedge is not a hedge of a hedge, or is a hedge of a hedge and paragraph (b) does not apply, the amount is the lesser of the following amounts:
                                      1. the amount of foreign currency hedged by the calculation hedge:
                                        1. the amount of foreign currency that is hedged by a person’s hedges including the calculation hedge less the amount of foreign currency that is hedged by a person’s FDR hedge portions excluding the calculation hedge less the total market value of a person’s non-eligible assets, treating a negative result as zero:
                                        2. the negative of the amount of foreign currency that is hedged by a person’s FDR hedge portions excluding the calculation hedge, if—
                                          1. the calculation hedge is a hedge of a hedge; and
                                            1. the amount of foreign currency that is hedged by a person’s FDR hedge portions excluding the calculation hedge plus the calculation hedge equals less than zero.

                                            2. Section EM 7 overrides this section.

                                            Notes
                                            • Section EM 5: inserted, on , by section 49 of the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Act 2013 (2013 No 52).
                                            • Section EM 5 heading: amended, on , by section 91(1) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(1) heading: replaced, on , by section 91(2) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(1): replaced, on , by section 91(2) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(2) heading: repealed, on , pursuant to section 91(3) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(2): repealed, on , by section 91(3) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(3) heading: replaced, on , by section 91(4) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(3): replaced, on , by section 91(4) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(4) heading: amended, on , by section 91(5) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(4): amended, on , by section 91(6) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(4): amended, on , by section 91(7) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(5)(a): replaced, on , by section 91(8) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(6) heading: repealed, on , pursuant to section 91(9) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(6): repealed, on , by section 91(9) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(7) heading: repealed, on , pursuant to section 91(9) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(7): repealed, on , by section 91(9) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(8): replaced, on , by section 91(10) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(9) heading: replaced, on , by section 91(11) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(9): replaced, on , by section 91(11) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(10) heading: replaced, on , by section 91(11) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(10): replaced, on , by section 91(11) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(10B) heading: inserted, on , by section 91(11) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(10B): inserted, on , by section 91(11) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(10C) heading: inserted, on , by section 91(11) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(10C): inserted, on , by section 91(11) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(10D) heading: inserted, on , by section 91(11) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5(10D): inserted, on , by section 91(11) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EM 5 list of defined terms non-eligible assets: inserted, on , by section 91(12) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).