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EM 5: Fair dividend rate hedge portions: hedge-by-hedge methods
or “Calculating hedge portions for foreign investments using two different methods”
You could also call this:

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

This part of the law explains how to work out the fair dividend rate hedge portions for your eligible hedges if you choose to use the portfolio method. You can make this choice under section EM 4.

The fair dividend rate hedge portion is the lower of two amounts that the law describes. You need to apply this portion for a period of 1 month or less for all your eligible hedges. You decide how long this period is, but once you choose, you can’t change it. You must work out this portion before the period starts, and use it for all your eligible hedges for the rest of the tax year.

To find the first amount, you use a formula: 1 minus (non-eligible assets divided by portfolio hedges amount). Non-eligible assets are the total market value of assets that don’t qualify. The portfolio hedges amount is the total amount of foreign currency that you’ve hedged.

To find the second amount, you use another formula: (1.05 times eligible assets) divided by portfolio hedges amount. Eligible assets are the total market value of certain assets you own directly. If you’re a qualifying hedge fund, you can also include some assets owned by a multi-rate PIE that you have an interest in.

In both formulas, you need to use New Zealand currency for all the values.

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Next up: EM 6: Income and expenditure for fair dividend rate hedge portions

or “How to calculate income or spending for fair dividend rate hedge portions”
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Part E Timing and quantifying rules
Hedging of currency movements in Australian non-attributing shares and attributing FDR method interests

EM 5BFair dividend rate hedge portions: portfolio method

  1. This section calculates the fair dividend rate hedge portions for a person’s eligible hedges on a portfolio basis under an election provided by section EM 4.

  2. The fair dividend rate hedge portion is the lowest of the amounts described in subsections (4) and (6).

  3. The fair dividend rate hedge portion is applied for a period of 1 month or less, as chosen by the person, for all of their eligible hedges. The fair dividend rate hedge portion is calculated before the start of the elected period, and the elected period is irrevocable, and is applied for all of their eligible hedges post-election, for the income year.

  4. For the purposes of subsection (2), the amount is calculated using formula—

    1 − (non-eligible assets ÷ portfolio hedges amount).

    Where:

    • In the formula in subsection (4), all items are expressed in New Zealand currency, and—

    • non-eligible assets is the total market value of non-eligible assets:
      1. portfolio hedges amount is the total amount of foreign currency that is hedged by a person’s hedges.

        1. For the purposes of subsection (2), the amount is calculated using the formula—

          (1.05 × eligible assets) ÷ portfolio hedges amount.

          Where:

          • In the formula in subsection (6), all items are expressed in New Zealand currency, and—

          • eligible assets is the total market value of assets described in section EM 1(1)(a) and (b) that the person owns directly, 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. portfolio hedges amount is the total amount of foreign currency that is hedged by a person’s hedges.

              Notes
              • Section EM 5B: inserted, on , by section 92 of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).