AX INFORMATION BULLETIN - IRD...under the Federal Insurance Contributions Act (FICA) of the United...

ISSN 0114-7161

This is an Inland Revenue service to people with an interest in New Zealand taxation.

AX INFORMATION BULLETINTVol 13, No 7 July 2001

Contents

This month’s opportunity for you to comment 3

Binding rulings

Federal Insurance Contributions Act (FICA) 4– Fringe Benefit Tax (FBT) liabilityPublic Ruling – BR Pub 01/05

Maori Trust Boards: declaration of trust for 8charitable purposes made under section 24Bof the Maori Trust Boards Act 1955– income tax consequencesPublic Ruling – BR Pub 01/07

Product Ruling – BR Prd 01/05 14






New legislation

2000–2001 deemed rate of return for foreign 36investment fund rules

Interpretation statements

Financial planning fees – GST treatment 37

Legislation and determinations

Determination: Amount of a specified withholding 51payment (being honoraria paid to school trustees)that shall be regarded as expenditure incurred inproduction of payment

Legal decisions – case notes

Whether waiver of time bar for assessment effective 53CIR v Vela Fishing Limited

Application for judicial review; application for 54leave to proceedFloorlines (NZ) Ltd and W A Duncan v CIR

Regular features

Due dates reminder 56

Your chance to comment on draft taxation items 57before they are finalised

This TIB has no appendix

Inland Revenue Department Tax Information Bulletin: Vol 13, No 7 (July 2001)

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THIS MONTH’S OPPORTUNITY FOR YOU TO COMMENT

Inland Revenue produces a number of statements and rulings aimed at explaining how taxation law affectstaxpayers and their agents.

Because we are keen to produce items that accurately and fairly reflect taxation legislation, and are useful inpractical situations, your input into the process—as perhaps a user of that legislation—is highly valued.

The following draft item is available for review/comment this month, having a deadline of 31 August 2001. Pleasesee page 57 for details on how to obtain a copy:

Ref. Draft type Description

PU2956 Public ruling Payments made by parents or guardians of students to state schools – GSTtreatment


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BINDING RULINGS

This section of the TIB contains binding rulings that the Commissioner of Inland Revenue has issued recently.

The Commissioner can issue binding rulings in certain situations. Inland Revenue is bound to follow such aruling if a taxpayer to whom the ruling applies calculates tax liability based on it.

For full details of how binding rulings work, see our information booklet Adjudication & Rulings, a guideto Binding Rulings (IR 715) or the article on page 1 of Tax Information Bulletin Vol 6, No 12 (May 1995) orVol 7, No 2 (August 1995).

You can download these publications free of charge from our website at www.ird.govt.nz

FEDERAL INSURANCE CONTRIBUTIONS ACT (FICA) –FRINGE BENEFIT TAX (FBT) LIABILITY

PUBLIC RULING – BR Pub 01/05

This is a public ruling made under section 91D of theTax Administration Act 1994.

Taxation LawsAll legislative references are to the Income Tax Act1994 unless otherwise stated.

This Ruling applies in respect of sections CI 1(e),CI 1(g) and CI 1(h).

The Arrangement to which thisRuling appliesThe Arrangement is the deduction of FICAcontributions and the paying of these along with theemployer contribution, to the United States FederalGovernment in accordance with the Federal InsuranceContribution Act, by any New Zealand residentemployer who is required to do so due to employing acitizen or citizens of the United States of America.

How the Taxation Laws apply tothe ArrangementThe Taxation Laws apply to the Arrangement asfollows:

• Moneys paid to FICA are not subject to FBTunder section CI 1(g), as the contributions arenot made to a “superannuation scheme” asdefined in section OB 1.

• Moneys paid to FICA are not subject to FBTunder section CI 1(h), as no benefit is receivedby the employee in the quarter or income yearwithin the meaning of the FBT rules.

• Moneys paid to FICA are not subject to FBTunder section CI 1(e), as the FICA scheme hasnot been approved by the Commissioner for thepurposes of section CB 5, and FICA is not a“sick, accident or death benefit fund” asdefined in section CB 5(2).

The period or income year forwhich this Ruling appliesThis Ruling will apply for the period 1 July 2001 to30 June 2004.

This Ruling is signed by me on the 11th day of May2001.

Martin Smith

General Manager (Adjudication & Rulings)


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COMMENTARY ON PUBLIC RULING BR PUB 01/05and where the superannuation scheme is a trust, any referencein this Act to a superannuation scheme includes a referenceto the trustees of that scheme:

Application of the legislationThe substantive issue is whether the employer isrequired to pay fringe benefit tax (FBT) on any part ofthe contributions made to the FICA scheme.

The employee contribution is required to be withheldfrom the employee’s gross income by the employerand is therefore not considered to be a fringe benefitprovided by the employer, as it is expenditure onaccount of the employee.

The employer contribution is required to be paid overand above the employee’s gross salary or wages.An issue arises as to whether FBT applies to theemployer contribution, as this is a payment by anemployer in relation to an employee.

Section CI 1(g)Section CI 1(g) concerns whether contributions aremade to a “superannuation scheme”, as defined insection OB 1, and therefore attract FBT.

Under subsection (c) of that definition,“superannuation scheme” includes:

any arrangement constituted under an Act of the Parliamentof New Zealand, other than the Social Security Act 1964,principally for the purpose of providing retirement benefitsto natural persons; or any similar arrangement constitutedunder the legislation of any country, territory, state, or localauthority outside New Zealand.

Therefore, to come within the “superannuationscheme” definition, an arrangement constituted underthe legislation of any country or state outsideNew Zealand, such as FICA, must be similar to anarrangement constituted under New Zealandlegislation that has the principal purpose of providingretirement benefits.

Two basic or generic types of employee superannuationschemes exist: defined contribution schemes anddefined benefit schemes. A defined contributionscheme is one where contributions are defined inadvance, usually as a fixed percentage of an employee’ssalary, and benefits are determined by the amount ofaccumulated contributions plus income earned on thosecontributions. In such schemes the principle ofallocated funding is employed, where contributions areinvested as a common fund, but separate accounts areopened in respect of each member. Given that there isno beneficial entitlement to any particular amount thathas been contributed to the FICA scheme (as the FICAscheme pays a statutorily fixed benefit on the basis ofeventual eligibility as opposed to contributions made), itis considered that the FICA is not a sufficiently similararrangement to a defined contribution scheme.

This commentary is not a legally binding statement,but is intended to provide assistance in understandingand applying the conclusions reached in Public RulingBR Pub 01/05 (“the Ruling”).

BackgroundIf a United States Citizen is employed in New Zealand,under the Federal Insurance Contributions Act (FICA)of the United States of America, employers andemployees may be required to contribute a statedpercentage of taxable wages paid to the FICA scheme.The employee portion of the FICA contribution mustbe withheld and paid from each payment of taxablewages, and in addition the employer must pay theemployer portion.

The FICA establishes two funds. The first is old age,survivors, and disability insurance (OASDI). Thesecond is hospital insurance (HI). The current rate ofcontribution to the FICA scheme is 7.65%, made up of6.2% for OASDI and 1.45% for the HI portion. ThisOASDI/HI rate of 7.65% is imposed on both theemployer and the employee, so the employercontribution together with the employee’s withheldamount result in a combined rate of 15.3%.

LegislationThe relevant meaning of “fringe benefit” is defined insection CI 1 as follows:

In the FBT rules, “fringe benefit”, in relation to an employeeand to any quarter or (where fringe benefit tax is payable onan income year basis under section ND 4) income year,means any benefit that consists of –

…

(e) In relation to an employer of an employee, anycontribution to any sick, accident, or death benefitfund which has been approved by the Commissionerfor the purposes ofCB 5:

…

(g) Any contribution in relation to an employer of anemployee, to any superannuation scheme:

(h) Any benefit of any other kind whatever, received orenjoyed by the employee in the quarter or (wherefringe benefit tax is payable on an income year basisunder section ND 4) income year, -

The relevant meaning of “superannuation scheme” isdefined in section OB 1 as follows:

“Superannuation scheme” means-

…

(c) Any arrangement constituted under an Act of theParliament of New Zealand, other than the SocialSecurity Act 1964, principally for the purpose ofproviding retirement benefits to natural persons; orany similar arrangement constituted under thelegislation of any country, territory, state, or localauthority outside New Zealand;–


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A defined benefit scheme is one that provides benefitsbased on a predetermined formula, usually relating thebenefit level to the number of years of service and, insome cases, the average or recent levels of pay. Suchschemes employ unallocated funding, and theemployer contribution rate varies in order to meet thecost of providing the defined benefit. While FICA mayprima facie appear similar to such a scheme in that italso employs unallocated funding and memberscontribute a fixed percentage of salary, it is consideredthe FICA is not sufficiently similar to a generic definedbenefit scheme, as the employer’s contribution andemployee’s contribution are matched and the rate iscontained in statute. This statutorily imposed rate isfixed by the Federal Government of the United States,is involuntary, and an employer who fails to contributethe full amount as set down in statute may be liable forcivil or criminal penalties.

It is therefore considered that FICA is not asufficiently similar arrangement to either of thesegeneric schemes (constituted under an Act of theParliament of New Zealand principally for providingretirement benefits) to be regarded as asuperannuation scheme as defined in section OB 1.

It is further concluded that the FICA is more similar tothe New Zealand Social Security Act 1964, which isexplicitly excluded from the definition of“superannuation scheme” as (on the words of thesection) are similar arrangements constituted under thelegislation of another country. Both schemes are taxfunded and are the main government-providedretirement benefit schemes in the respective countries.In addition, both schemes form the basis of the socialsecurity systems in the respective countries, providingadditional benefits such as those for sickness anddisability. This conclusion takes FICA outside thedefinition of “superannuation scheme”, socontributions to the FICA are not caught bysection CI 1(h) as being liable to FBT.

Furthermore, contributions to FICA are more like a taxthan a contribution to any superannuation scheme, assupported by the words of the Federal InsuranceContributions Act referring to the contributions as an“excise tax” (section 3111(a) and 3111(b)) and thepenalties payable for non-payment of contributionsthat are the same as those for non-payment of federalincome tax under the Internal Revenue Code. Thisview is also supported by an Australian decision,Case 20 CTBR (NS) Vol. 7, 91 that by a majority heldemployee contributions under the FICA to be in thenature of an income tax, implying that the compulsoryemployer contribution is likewise more in the nature ofa tax.

Section CI 1(h)Section CI 1(h) includes as a fringe benefit “anybenefit of any other kind whatever”.

In addition, a fringe benefit under section CI 1(h) mustbe a benefit that is:

used, enjoyed, or received, whether directly or indirectly, inrelation to, in the course of, or by virtue of the employmentof the employee… and which is provided or granted by theemployer of the employee.

The Commissioner considers that the withholding ofamounts from employees’ wages or salaries providesno benefit. As to the employer’s contribution, it isconsidered that in the absence of a beneficialentitlement to a matched contractual amount, nobenefit is provided either.

It cannot be said that the employee receives a benefitat the point in time the employer makes a contributionto FICA, because it is a compulsory tax, goes into theFederal Government tax pool, and no beneficial sum is“belonging” to the employee. In addition, anyeventual benefits from the FICA scheme do not satisfythe combination of requirements in section CI 1(h) toattract FBT liability.

It is a contingency whether the taxpayer ever receivesany payment back from the Federal Government, asany benefit received depends on an individual meetingthe eligibility requirements (entitlement to the old agebenefit is based on reaching the age of 62 and beingfully insured).

If an individual does receive a payment under theFICA scheme (paid as a monthly benefit), the persondoes so because of his or her United States citizenshipand meeting the eligibility criteria etc. The personreceives the government mandated amount, asopposed to a sum based on actual contributions madeto the scheme.

So whilst eligibility in part is due to previouscontributions made to FICA (and some of these aremade by the employer), and this may be considered,“indirectly, in relation to, in the course of, or by virtueof the employment of the employee”, if these wordsare of the widest import, overall, it is considered thenexus or connection between any eventual benefit andthe employment of the employee is too remote(especially given that the only nexus is to eligibility atall, and not in any way connected to the quantum ofany eventual benefit received).

Principally, the reason the benefit is received by theemployee is not by virtue of the employee’semployment, but because the employee is a UnitedStates citizen. Contributions to the scheme are notmade voluntarily, but are compulsorily imposed by theFederal Government of the United States, and are notpart of any employment contract or remunerationpackage.


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Any amounts received by a United States citizen fromFICA will be received from the Federal Governmentand not in the course of, or by virtue of, theemployment relationship. Such a conclusion isconsistent with the outcome of Constable v FC of T(1952) 86 CLR 402, where the High Court of Australiaconcluded that Constable only became entitled topayments under his scheme as a result ofcontingencies that had become absolute in the year inquestion, but that such an event did not give rise to an“allowance, gratuity, compensation, benefit […]” tothe employee “in respect of, or for or in relation” to hisemployment.

Accordingly, no benefit is “received by the employeein the quarter or income year” when the employee isbeing paid, and no sufficient nexus exists between theemployer’s requirement to pay funds to the FederalGovernment of the United States and the ultimatebenefit the employee may eventually receive from thegovernment at a later date, if eligible under statute.

Section CI 1(e)Section CI 1(e) includes as a fringe benefit:

In relation to an employer of an employee, any contributionto any sick, accident, or death benefit fund which has beenapproved by the Commissioner for the purposes of sectionCB 5:

The Commissioner has not approved the FICA schemefor the purposes of section CB 5.

The term “sick, accident, or death benefit fund” is notdefined for the purpose of section CI 1(e), but isdefined in section CB 5(2) for the purpose of thatsection. Section CI (1)(e) and section CB 5(2) areinterlinked, as section CI (1)(e) requires that a “sick,accident or death benefit fund” be approved by theCommissioner for the purposes of section CB 5. To beapproved under section CB 5 such a fund must satisfythe section CB 5(2) definition.

The FICA scheme is not a “sick, accident, or deathbenefit fund” as that term is defined in section CB 5(2),as the FICA scheme is not established for the “benefitof the employees of any employer” as required by thatdefinition. FICA is the funding scheme for theprovision of United States social security benefits andthere is no sufficient nexus between the employer’srequirement to pay funds to FICA and any benefit theemployee may eventually receive from the governmentat a later date, if eligible under statute.

Accordingly, any payments made to the FICA schemeare not considered to be subject to fringe benefit taxunder section CI (1)(e).


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MAORI TRUST BOARDS: DECLARATION OF TRUST FORCHARITABLE PURPOSES MADE UNDER SECTION 24BOF THE MAORI TRUST BOARDS ACT 1955 – INCOMETAX CONSEQUENCES

PUBLIC RULING – BR Pub 01/07

How the Taxation Law appliesto the ArrangementWhere a Maori Trust Board executes a declaration oftrust that it shall stand possessed of property forcharitable purposes, under section 24B(1) of the MaoriTrust Boards Act 1955, the income of such a trust isexempt from income tax under sections CB 4 (1)(c) orCB 4 (1)(e) of the Income Tax Act 1994 if:

• all of the purposes specified in the declarationof trust are purposes that are specified insections 24 or 24A of the Maori Trust BoardsAct 1955; and

• the Commissioner is satisfied that, with theexception of the charitable purpose requirementand the public benefit test, all otherrequirements of charitable status are met; and

• the declaration of trust has been submitted toand approved by the Commissioner of InlandRevenue, as required by section 24B(3) of theMaori Trust Boards Act 1955.

The period for which thisRuling appliesThis Ruling applies to income derived by such a MaoriTrust Board during income years falling within theperiod 1 April 2001 and 31 March 2006 (inclusive).

This Ruling is signed by me on the 9th day of July2001.

Martin Smith


Note (not part of ruling): This ruling is essentially thesame as public ruling BR Pub 97/8 which waspublished in TIB Vol 9, No 8 (August 1997). BR Pub97/8 applied up until 31 March 2001. Therefore thisnew ruling still relates to the charitable status of trustsestablished by Maori Trust Boards pursuant to theexecution of a declaration of trust, under section24B(1) of the Maori Trust Boards Act 1955. However,it should be noted that the reissue of BR Pub 97/8 isseparate from the government discussion documenton taxation issues relating to charities and non-profitbodies (Tax and Charities) which was released forpublic consultation on 14 June 2001, for comments bythe end of July 2001.

This is a public ruling made under section 91D of theTax Administration Act 1994.

Taxation LawAll legislative references are to the Income Tax Act,unless otherwise stated.

This Ruling applies in respect of sections CB 4 (1)(c)and CB 4 (1)(e) of the Income Tax Act 1994.

The Arrangement to which thisRuling appliesThis arrangement is the derivation of income by a trustestablished by a Maori Trust Board pursuant to theexecution of a declaration of trust, under section24B(1) of the Maori Trust Boards Act 1955, declaringthat it stands possessed of any of its property upontrust for charitable purposes.


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COMMENTARY ON PUBLIC RULING BR PUB 01/07Provided that if those purposes are not limited to NewZealand the Commissioner may apportion the incomein such manner as the Commissioner deems just andreasonable between those purposes within New Zealandand the like purposes out of New Zealand, andaccordingly only a part of the amount may be exemptincome:…

Maori Trust Boards Act 1955Section 24B of the Maori Trust Boards Act 1955states:

(1) Any Board may from time to time, in its discretion,execute under its seal a declaration of trust declaringthat it shall stand possessed of any of its property,whether real or personal, upon trust for charitablepurposes.

(2) Any income derived by the Board from any propertyto which the declaration relates shall be applied forsuch purposes referred to in section 24 or section 24Aof this Act as may be specified in the declaration oftrust; and, for the purposes of the Income Tax Act1994, any such income shall be deemed to be incomederived by trustees in trust for charitable purposes.

(3) No declaration of trust under this section shall haveany force or effect unless it has been approved by theCommissioner of Inland Revenue.

Sections 24 and 24A specify the purposes for which aMaori Trust Board may apply money.

Application of the Legislation

Charitable purposesFor a trust to be considered charitable for thepurposes of the Income Tax Act, it must generally meetthe common law requirements of charity. That is, atrust must be established for a “charitable purpose”,and must meet what is known as the “public benefittest”.

The term “charitable purpose” is defined in the IncomeTax Act, as:

…includes every charitable purpose, whether it relates to therelief of poverty, the advancement of education or religion,or any other matter beneficial to the community:

The Court of Appeal noted in Molloy v CIR (1981) 5NZTC 61,070 that the definition of charitable purposein the Income Tax Act does not have the effect ofenlarging or altering the ordinary, general law, meaningof charity. This means that it is necessary to refer togeneral law to determine whether any specific taxpayer,or activity, is charitable. In Commrs of IT v Pemsel[1891] AC 531, p.583, Lord Macnaghten determinedthat all charitable purposes fall within four classes ofcharity (known as the “Pemsel Heads”), namely:

• the advancement of religion;

• the relief of poverty;

• the advancement of education; and

• any other matter beneficial to the community.

This commentary is not a legally binding statement,but is intended to provide assistance in understandingand applying the conclusions reached in Public RulingBR Pub 01/07 (“the Ruling”).

BackgroundSections CB 4 (1)(c) and (e) of the Income Tax Act 1994provide the following exemptions from income tax forincome derived by a charitable trust:

• Under section CB 4 (1)(c), income derived bytrustees in trust for charitable purposes or byany institution established exclusively forcharitable purposes (except income to whichsection CB 4 (1)(e) applies).

• Under section CB 4 (1)(e), income derived froma business carried on by trustees in trust forcharitable purposes or by any institutionestablished exclusively for charitable purposes.

Neither exemption is available if any person is able toinfluence the amount of any private pecuniary benefitfrom the trust. The exemption under CB 4 (1)(e) onlyapplies to the extent that the charitable purposes arelimited to New Zealand.

Under section 24B of the Maori Trust Boards Act1955, a Maori Trust Board may declare that it holdsproperty in trust for charitable purposes. The incomeof the trust can only be applied for those purposes setout in sections 24 and 24A of that Act and which arespecified in the declaration of trust. Section 24Bdeems the income of such a trust to be income derivedby trustees in trust for charitable purposes for thepurposes of the Income Tax Act 1994.

Income tax exemption – sectionCB 4 (1)(c) and (e)Section CB 4 (1) provides an exemption from incometax for:

…

(c) Any amount derived by trustees in trust for charitablepurposes or derived by any society or institutionestablished exclusively for charitable purposes and notcarried on for the private pecuniary profit of anyindividual, except where the income so derived isincome to which paragraph (e) applies:

…

(e) Any amount derived directly or indirectly from anybusiness carried on by or on behalf of or for the benefitto trustees in trust for charitable purposes within NewZealand, or derived directly or indirectly from anybusiness carried on by or on behalf of or for the benefitof any society or institution established exclusively forsuch purposes and not carried on for the privatepecuniary profit of any individual.


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In addition to falling within one of the “PemselHeads”, with the exception of a trust for the relief ofpoverty, to be charitable in law a trust must beestablished for the benefit of the community or asufficiently important class of the community, ratherthan for the benefit of private individuals. Thisrequirement, which is in addition to the objects of thecharity falling within one of the four heads listedabove, is known as the public benefit test.

The public benefit test has been endorsed and furtherdeveloped by a large body of case law, includingVerge v Somerville [1924] All ER 121, Oppenheim vTobacco Securities Trust Company Limited [1951] 1All ER 31, Davies v Perpetual Trustee Co. (Ltd.) [1959]2 All ER 128 and New Zealand Society of Accountantsv CIR [1986] 1 NZLR 148.

Section 24B of the Maori Trust BoardsAct 1955Section 24B of the Maori Trust Boards Act 1955 wasinserted into that Act by section 3 of the Maori TrustBoards Amendment Act 1962. Section 24B permits theestablishment of charitable trusts by Maori TrustBoards, and provides a concessionary tax treatment ofthe income of such trusts.

There are two possible interpretations of the meaningof section 24B of the Maori Trust Boards Act:

• The first interpretation is that a declaration canonly be made under section 24B(1) if thepurposes of the trust are exclusively charitable,i.e. “charitable” being interpreted as thecommon law meaning of the term. Althoughsection 24B(2) only requires that the income ofthe trust must be applied for purposes referredto in section 24 and 24A, it follows from thisapproach that, as the trust must be alsocharitable, the income can only be applied forsection 24 and 24A purposes that arethemselves charitable. Such income wouldtherefore be exempt under the provisions of theIncome Tax Act.

• The second interpretation is that the income ofa section 24B trust can be applied for any of thepurposes referred to in section 24 or 24A –whether those purposes are charitable undergeneral law or not. However, this approachproceeds upon the basis that any incomederived by the trust is deemed by section24B(2), to the extent that it is applied forpurposes specified in sections 24 and/or 24A,to be income derived in trust for charitablepurposes for the purposes of the Income TaxAct, and therefore exempt from income tax.This is irrespective of whether the purpose is apurpose that would generally be consideredcharitable in law.

The background papers relating to the introduction ofsection 24B, including Hansard, indicate that the newsection was intended to remedy the concern, at thetime, that trusts established by Maori Trust Boardswere not considered charitable in terms of both thecommon law and the income tax legislation.

This view of the law was confirmed by the Court inArawa Maori Trust Board v Commissioner of InlandRevenue (1961) 10 MCD 391. In that case Donne S Mruled that a trust established by the Arawa MaoriTrust Board was not charitable because:

• Many of the purposes specified in section 24 ofthe Maori Trust Boards Act 1955 were notcharitable purposes under the general law; and

• The trust failed the public benefit test becauseit was for the benefit of a group of personsdetermined by their bloodline, or whakapapa.The Court determined that such a group ofpeople did not satisfy the public benefit test.

AnalysisThe Commissioner believes the better view of the lawto be that contained in the second interpretation, asset out above, and that the first interpretation was notwhat was intended by Parliament.

As has been noted, at the time that section 24B wasenacted, it was strongly arguable, taking into accountthe Court decision in Arawa, that a trust that benefitsa specific tribe or iwi, or the members of such a tribe oriwi, cannot be charitable at common law because it willnot meet the requirements of the public benefit test.Therefore, it would be arguable that any trustestablished under section 24B could not be charitable,irrespective of the purposes for which it wasestablished, because Maori Trust Boards areacknowledged by the Maori Trust Boards Act to befor the benefit of iwi and hapu determined on the basisof whakapapa.

This would give rise to a situation where, despite theenactment of section 24B, trusts established by MaoriTrust Boards would possibly continue to be deniedcharitable status, and the amendment would have noeffective operation. Clearly, this cannot have been theintention of Parliament.

Taking this into account, and after considering theavailable background documents, the Minister’sstatement (as recorded in Hansard) and theCommissioner of Inland Revenue’s practiceimmediately following the enactment of section 24B,the Commissioner believes that the secondinterpretation is the correct view of the law.


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Under this interpretation, section 24B(1) allows aMaori Trust Board to declare that it holds property intrust for charitable purposes, and authorises the TrustBoard to settle some of the Trust’s assets to acharitable trust.

Section 24B(2) contains two limbs. The first limbstates:

Any income derived by the Board from any property towhich the declaration relates shall be applied for suchpurposes referred to in section 24 or section 24A of this Actas may be specified in the declaration of trust; …

The Commissioner considers that this limb limits thepurposes for which the income of a charitable trust canbe applied to those purposes that are referred to insections 24 and 24A. The purposes for which theincome is to be applied must be specified in thedeclaration of trust.

As previously noted, many of the purposes referred toin sections 24 and 24A may not be charitable purposesunder common law. In addition, any trust establishedby a Trust Board is only allowed to apply its incomefor the benefit of the Trust Board’s beneficiaries,which are restricted, by the Maori Trust Boards Act, tothe members of specified iwi. Such a requirementcould mean that a trust would fail the public benefittest applied under the common law.

However, the second limb of section 24B(2) deems theincome of the trust to be “income derived by trusteesin trust for charitable purposes”. The second limbstates:

and, for the purposes of the Income Tax Act 1994, any suchincome shall be deemed to be income derived by trustees intrust for charitable purposes.

Therefore, the effect of this section is to deem theincome of the trust, even though it is established forpurposes that may not be charitable in general law, tobe “income derived by trustees in trust for charitablepurposes” for the purposes of the Income Tax Act1994. This means that the requirements of sections CB4 (1)(c) and (e) of the Income Tax Act 1994, to theextent that those sections only apply to “incomederived by trustees in trust for charitable purposes”,have been satisfied. It is, therefore, not necessary forsuch a trust to satisfy the common law requirements of“charitable purpose” and the “public benefit test”.

However, it should be noted that section 24B(2) of theMaori Trust Boards Act only modifies therequirements of the Income Tax Act. It does not applyfor any other purposes.

Therefore, whatever may be the position of such atrust under common law and irrespective of whetherthe public benefit test would be failed in othercontexts, the Commissioner is satisfied that in thisprovision Parliament intended for a trust establishedunder section 24B to be treated as being a charitabletrust for income tax purposes. The income of such a

trust is therefore treated as having been derived forcharitable purposes and as such is exempt from incometax under sections CB 4 (1)(c) or (e) of the Income TaxAct 1994.

Nevertheless, before that exemption can be applied,the requirements of section 24B(3) must be satisfied.That section requires a declaration of trust undersection 24B(1) to be approved by the Commissioner ofInland Revenue before it will take effect. TheCommissioner must still be satisfied that theconstituting documents of the trust meet the legalrequirements of a charitable trust, other than the publicbenefit test discussed above.

Approval of charitable trustAs has been outlined earlier in this commentary,section 24B(2) of the Maori Trusts Board Act 1955modifies the general law requirements of a trustestablished under subsection (1) to the extent that thetrust is not required to satisfy the meaning of“charitable purpose” in section OB 1 of the Income TaxAct 1994 or the public benefit test. However, beforesuch a trust will be approved by the Commissionerunder section 24B(3) as wholly exempt from tax, thetrust must still meet the other criteria of a charitabletrust.

For example, the Commissioner must also be satisfiedthat the declaration of trust provides that:

• the charitable activities are restricted to NewZealand;

• the rules of the trust cannot be changed inorder to allow the income of the trust to beapplied to purposes that are not specified insections 24 or 24A of the Maori Trust BoardsAct, or to otherwise affect the charitable natureof the trust;

• no person is able to derive a personal pecuniaryprofit from the trust;

• trustees are unable to materially influence theirremuneration;

• professional services provided by trustees tothe trust are provided at commercial rates andthat conflicts of interest are avoided; and

• upon winding up, any remaining trust assetsmust be applied for charitable purposes.

This is not an exhaustive list of all matters that theCommissioner will consider when deciding whether ornot a trust is charitable, and therefore entitled to thetax exemptions under sections CB 4 (1)(c) and (e).


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When a section 24B trust has previously obtained theapproval of the Commissioner, as required by section24B(3) of the Maori Trust Boards Act, that approvalwill continue to apply. Approval given by theCommissioner under section 24B(3) cannot berevoked. However, continued tax exemption in respectof the income of the trust is dependent on the trustcontinuing to apply its income for the purposesspecified in the declaration.

Comments on technicalsubmissions received prior tothe previous public rulingbeing issuedWhen a draft public binding ruling on this subject wasfirst made available for public comment, a number ofsubmissions were received that disagreed with theviews expressed in that draft ruling. In particular,those submissions noted that the Commissioner didnot appear to have taken into account the use of adeeming provision in section 24B. That view, that thedeeming provision effectively creates a charitable trustwhere one would not exist under general charitablelaw, was incorporated into the previous ruling and hasbeen included in this ruling.

A number of commentators also disagreed with theCourt decision in Arawa and the general position oftrusts for the benefit of iwi under the public benefittest. That issue was referred to in the commentary tothe previous ruling, and is referred to in thiscommentary in so far as it is relevant to the issue beingconsidered. While the Commissioner did consider theposition of such trusts generally in an interpretationpaper (IP3168) which went out for public consultationin January 2000 that matter has been put on holdpending the outcome of the recently releasedgovernment discussion document on taxation issuesrelating to charities and non-profit bodies.

A submission was also received that argued that theCommissioner was not legally able to issue a bindingruling on the effect of a declaration made under aprovision of an Act other than one of the InlandRevenue Acts. The Commissioner was, and is, of theview that he is able to issue this Ruling because itrelates to the consequences of such a declarationunder the income tax law and, in particular, to theapplication of sections CB 4 (1)(c) and CB 4 (1)(e) ofthe Income Tax Act 1994.

In the context of the previous ruling, Te Runanga ONgai Tahu asked for the ruling to be expanded to dealspecifically with its specific circumstances. The NgaiTahu Trust Board executed a declaration of trustpursuant to section 24B in 1975. That Trust Board wasdissolved by the Te Runanga O Ngai Tahu Act 1996,which also established the Runanga. All of the assets

and liabilities of the former trust board were vested inthe new Runanga. Section 30(1)(c) of the Te RunangaO Ngai Tahu Act provides:

30. Taxes and duties—(1) For the purposes of the InlandRevenue Acts (as defined in section 3(1) of the Tax Adminis-tration Act 1994) and any other enactment that imposes orprovides for the collection of any tax, levy, or othercharge,—

(c) Notwithstanding the dissolution of the Ngaitahu MaoriTrust Board by this Act, any income derived by TeRunanga o Ngai Tahu from any property to which adeclaration of trust made by the Ngaitahu Maori TrustBoard under section 24B of the Maori Trust Boards Act1955 and dated the 24th day of March 1975 relatesshall, if applied for the purposes specified in thedeclaration, be deemed, for the purposes of the IncomeTax Act 1994, to be income derived by Te Runanga oNgai Tahu in trust for charitable purposes.

The Commissioner remains of the view that,notwithstanding the fact that the Trust Board hasbeen dissolved and no longer exists, section 30(1)(c)provides that any income derived from property thatwas subject to the original declaration, to the extentthat it is applied for the purposes specified in thedeclaration, shall be treated for tax purposes as beingderived in trust for charitable purposes. This meansthat the income of the trust created under section 24Bof the Maori Trust Boards Act will continue to beexempt for tax purposes.

Similar provisions may apply to other section 24Btrusts established by Trust Boards that have sincebeen dissolved.

Application of this RulingSection 91DA(1)(d) of the Tax Administration Act 1994requires the Commissioner to state the period forwhich a public binding ruling applies. TheCommissioner has determined that this public rulingwill apply to income derived by approved trusts duringincome years falling within the period 1 April 2001 to31 March 2006, inclusive.

Examples

Example 1A Maori Trust Board executes a declaration of trustunder section 24B of the Maori Trust Boards Act 1955.The declaration provides that the trust will hold certainassets upon trust for charitable purposes. Thedeclaration specifies that the income of the trust willbe applied by making grants to reimburse any dentalcosts incurred by any of the beneficiaries, beingmembers of the iwi.


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The declaration is submitted to the Commissioner whois satisfied that the purpose for which the trust’sincome will be applied is a purpose specified insection 24 of the Maori Trust Boards Act (section24(2)(a)(iii) “The promotion of health … byproviding, subsidising, or making grants for medical,nursing, or dental services” ) and that there areadequate provisions in the Trust Deed to prevent theTrust’s income and assets from being used for otherpurposes.

The Commissioner will therefore approve thedeclaration and the income of the trust will be exemptfrom income tax under sections CB 4 (1)(c) andCB 4 (1)(e) of the Income Tax Act 1994.

Example 2A Maori Trust makes a declaration under section 24Bfor the same purpose as described in Example 1. TheCommissioner is satisfied that the purpose for whichthe Trust’s income is to be applied is a purpose that isspecified in either section 24 or section 24A of theMaori Trust Boards Act.

However, it is found that the declaration does notprohibit the trustees from materially influencing theamount of remuneration that they receive. Thedeclaration also does not provide for the disbursementof assets, upon winding up, to other charitable entitiesor purposes.

The Commissioner will therefore decline approval untilsuch time as the declaration is amended in such amanner to satisfy the Commissioner’s requirements.


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PRODUCT RULING – BR PRD 01/05

3 Units in the AMP Tracker Fund will only besold or redeemed by the Trust in order toredeem the units of a member of the Trust.Units in the Trust will only be redeemed inwhole and cannot be redeemed in part. Unitsredeemed must be cancelled. Units in the Trustwill be issued on the basis that the ordering rule(subparagraph CF 3 (1)(b)(iv)(B)) applies.

4 The AMP Tracker Fund will make taxabledistributions to the Trust from any dividendsreceived by the AMP Tracker Fund either onreceipt or quarterly depending on the size of theTrust’s investment. The Trust must either re-invest any distribution in AMP Tracker Fundunits or make a distribution. The Trust willordinarily distribute such part, as is determinedby the manager, of its net income 6-monthly tounit holders and that net income will becalculated taking into account all costs, chargesand expenses due.

Conditions stipulated by theCommissionerThis Ruling is based on the conditions that:

(a) There is no arrangement between the Trusteeand any unit holder for the redemption of unitsin substitution for dividends.

(b) The Trust is an “unlisted trust” and a “widelyheld trust” in terms of the definition of thoseterms in section CF 3 (14).

(c) The Trust will not redeem units as part of apro rata cancellation of units.

(d) The Trust will not be quoted on the official listof a recognised exchange.

How the Taxation Laws apply tothe ArrangementSubject in all respects to any conditions stated above,the Taxation Laws apply to the Arrangement asfollows:

• The income distributed to unit holders annuallywill be treated as a dividend pursuant to sectionCF 2 (1)(i).

• The entire amount paid to unit holders on theredemption of the units will be excluded fromthe definition of dividend by section CF 3 (1)(b)to the extent that that amount does not exceedthe available subscribed capital per sharecancelled.

This Ruling expressly does not consider any potentialfor application of section BG 1 or section GB 1 (3).

This is a product ruling made under section 91F of theTax Administration Act 1994.

Name of the Person whoapplied for the RulingThis ruling has been applied for by ASB NZ SharesTrust.

Taxation LawAll legislative references are to the Income Tax Act1994 unless otherwise stated.

This Ruling applies in respect of sections CF 2 (1)(i)and CF 3 (1)(b).

The Arrangement to which thisRuling appliesThe Arrangement is the establishment and continuedoperation of a trust to be known as the ASB NZShares Trust (the “Trust”) in accordance with a masterdeed dated 17 October 1997, an establishment deeddated 17 October 1997, and a variation of master deeddated 17 October 1997. The Trust was established as aunit trust under the Unit Trusts Act 1960 and is a “unittrust” as defined in section OB 1 of the Income TaxAct.

Further details of the arrangement are set out in theparagraphs below.

1 The trustee of the Trust is Trustees Executorsand Agency Company of New Zealand Limited(the “Trustee”). The Trustee is registered as aTrustee company under the Trustee CompaniesAct 1967. The manager of the Trust is ASBInvestment Services limited, a subsidiary ofASB Bank Limited. The beneficial interests inthe Trust are divided into units. Each unitconfers an equal interest in the Trust but doesnot confer any interest in any particularinvestment of the Trust.

2 The Trust acts as a special purpose vehicle tohold units in the AMP Investments’ TrackerFund (the “AMP Tracker Fund”). Pursuant tothe Master Deed and Establishment Deed, theTrust is only authorised to invest contributionsfrom Members in the AMP Tracker Fund or incash investments. Cash investments areauthorised solely for the purposes of meetingliquidity and administrative requirements andmust otherwise be invested in AMP TrackerFund units as soon as practicably possible.


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The period or income year forwhich this Ruling appliesThis Ruling will apply for the period from 1 April 2001to 30 June 2001.

This Ruling is signed by me on this 14th day of May2001.

Martin Smith



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3 Units in the WINZ Fund will not be redeemedand will only be sold to the WINZ Fundmanager. Further, units in the WINZ Fund willonly be sold in order to redeem the units of amember of the Trust or in order to meet theTrust’s payment obligations under the hedgingarrangement in the event of a temporaryinsufficiency of cash. Units in the Trust willonly be redeemed in whole and cannot beredeemed in part.

4 The WINZ Fund will make taxable distributionsto the Trust from any income received by theWINZ Fund semi-annually within 20 days fromthe end of June and December in each year.The Trust must either re-invest any distributionin WINZ Fund units or make a distribution.The Trust will ordinarily distribute such part, asis determined by the manager, of its net income6-monthly to unit holders and that net incomewill be calculated taking into account all costs,charges and expenses due.

Conditions stipulated by theCommissionerThis Ruling is based on the conditions that:

(a) There is no arrangement between the Trusteeand any unit holder for the redemption of unitsin substitution for dividends.

(b) The Trust is an “unlisted trust” and a “widelyheld trust” in terms of the definition of thoseterms in section CF 3 (14).

(c) The Trust will not redeem Trust units as part ofa pro rata cancellation of units.

(d) The Trust will not be quoted on the official listof a recognised exchange.


• The income distributed to unit holders annuallywill be treated as a dividend pursuant to sectionCF 2 (1)(i).

• The amount paid to unit holders on theredemption of the units will be excluded fromthe definition of dividend by section CF 3 (1)(b)to the extent that that amount does not exceedthe available subscribed capital per sharecancelled.

This Ruling expressly does not consider any potentialfor application of section BG 1 or section GB 1 (3).


Name of the Person whoapplied for the RulingThis ruling has been applied for by ASB World SharesTrust.

Taxation LawAll legislative references are to the Income Tax Act1994 unless otherwise stated.

This Ruling applies in respect of sections CF 2 (1)(i)and CF 3 (1)(b).

The Arrangement to which thisRuling appliesThe Arrangement is the establishment and continuedoperation of the ASB World Shares Trust (the “Trust”)in accordance with a master deed dated 17 October1997, an establishment deed dated 17 October 1997,and a variation of master deed dated 17 October 1997.The Trust was established as a unit trust under theUnit Trusts Act 1960 and is a “unit trust’ as defined insection OB 1 of the Income Tax Act.


1 The trustee of the Trust is the TrusteesExecutors and Agency Company of NewZealand Limited (the “Trustee”). The Trustee isregistered as a Trustee company under theTrustee Companies Act 1967. The manager ofthe Trust is ASB Investment Services Limited, asubsidiary of ASB Bank Limited. The beneficialinterests in the Trust are divided into units.Each unit confers an equal interest in the Trustbut does not confer any interest in anyparticular investment of the Trust.

2 The Trust acts as a special purpose vehicle tohold units in the AMP Investments’ WorldIndex Fund (the “WINZ Fund”). Pursuant tothe Master Deed and Establishment Deed, theTrust is only authorised to invest contributionsfrom Members in the WINZ Fund, a fixed 50%after tax foreign currency hedge or in cashinvestments. Cash investments are authorisedsolely for the purposes of meeting liquidity andadministrative requirements and must otherwisebe invested in WINZ Fund units and theforeign currency hedge as soon as practicablypossible.


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The period or income year forwhich this Ruling appliesThis Ruling will apply for the period from 1 April 2001to 30 June 2001.

This Ruling is signed by me on this 14th day of May2001.

Martin Smith



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country amount to at least 2% of marketcapitalisation of the Tower Global Index.Currently there are six of these countries beingall of those currently specified in Part A ofSchedule 3 (excluding Norway). Shares will beheld only where the companies are subject totax in terms of the proviso to section CG 13(1)or are resident and subject to tax in the countryin terms of section CG 15(2)(b). The trust deeddoes not permit Tortis-INTL to hold shares inforeign entities specified in Part B of Schedule 4.The MSCI adjusted in this way is known as theTower Global Index.

4 If any of the countries included in the TowerGlobal Index leave the grey list then securitiesheld in companies resident in that country willbe immediately divested. If any company inwhich Tortis-INTL holds shares ceases to beresident in a grey list country, then shares heldin that company will be immediately divested.

5 With the exception of transactions relating tothe cash pool, index sampling or financialderivatives (these matters are explained below),Tortis-INTL will only enter into transactionsthat give effect to the investment policy toreplicate the Tower Global Index. The trackingof the Tower Global Index will not involveconsideration of profitability, yield, or any otherreturn based features. The only othersituations when shares will be bought and soldby Tortis-INTL is where it is necessary to fundthe redemption or repurchase of units inTortis-INTL (or restore liquidity to the cashpool to enable Tortis-INTL to fund theredemption of units) or for sampling.

6 The tracking of the Tower Global Index will beundertaken by State Street Global Advisors,Australia Limited (“State Street”).

7 Changes to the constituent stocks within theMSCI are made during the last week of themonth unless corporate actions such astakeovers/mergers effected prior to this periodrequire stocks to be added or removed earlier.Following adjustments to the MSCI the TowerGlobal Index will be adjusted in the appropriateproportion as soon as practicable. This willonly require Tortis-INTL to buy and sell stocksto replicate these adjustments. No sales orpurchases will be made as a result of changes inthe market capitalisation of a particular stock inthe MSCI arising as a consequence of actual oranticipated price fluctuations.


Name of the Person whoapplied for the RulingThis ruling has been applied for by Tortis-InternationalFund.


This Ruling applies in respect of sections CF 3(1)(b)and CF 3(1)(c).

The Arrangement to which thisRuling appliesThe Arrangement is the establishment and continuedoperation of a unit trust known as Tortis-INTLpursuant to a Deed of Trust dated 16 December 1996and amended on 18 February 1997 and 31 July 2000(the “trust deed”).


1 Tortis-INTL is a New Zealand tax resident. Thetrustee of Tortis-INTL is the Public Trustee.The manager of Tortis-INTL is Tower ManagedFunds Investments Limited. Tortis-INTL hasbeen established as a unit trust in terms of theUnit Trusts Act 1960 and meets the definitionof a “unit trust” contained in section OB 1.

2 Tortis-INTL is an open fund and new investorsare able to subscribe for units from time to time.The beneficial interest in Tortis-INTL is dividedinto units. Each unit confers an equal interest inTortis-INTL (other than a fractional unit whichwill confer a proportionate interest) but doesnot confer any interest in any particular part ofthe fund or any particular investment of thefund.

3 Tortis-INTL will act as an investment fund tohold a portfolio of shares. The composition ofthat portfolio will be determined as follows.Tortis-INTL will track international sharemarkets using only the countries included inthe Morgan Stanley Capital International Index(“MSCI”) which are also specified in Part A ofSchedule 3 (known as grey list countries), andat the time of their inclusion in the grey list, themarket capitalisation of MSCI companies in that


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8 The approach of Tortis-INTL is to replicate theTower Global Index. Initially, due to the smallsize of the portfolio when it was launched, StateStreet used index sampling to match the TowerGlobal Index. The sampling process entailedinvesting across the countries and industriescontained in the Tower Global Index on thebasis of market capitalisation, based oninformation from a computer model. Thecomputer model was non-discretionary andselected stocks based purely on marketcapitalisation and industry membership. Nostock forecasting techniques were incorporatedin the model. Sampling did not take intoaccount the individual, actual historical orforecast performance of any particular companywithin the Tower Global Index. As Tortis-INTLgrew and more units were purchased newstocks were added until the Tower Global Indexwas replicated. This approach was selfrebalancing and did not require stocks to bebought or sold as a result of individual pricechanges.

9 Due to the large number of companies in theTower Global Index Tortis-INTL investsincoming funds, that are not of sufficient size toconstitute effective replication of the index, infinancial derivatives relating to the TowerGlobal Index. This is the only basis on whichinvestments in financial derivatives occurs. Assoon as sufficient funds are accumulatedrelevant financial derivatives are closed out andan acquisition of further shares, which replicatethe Tower Global Index, is made. It isanticipated, depending on the size of the fund,that between 2% and 5% of the total fund willbe invested in financial derivatives.

10 Tortis-INTL permits investors to exit byredeeming units or by repurchase of units bythe manager. These are the only methods ofexit offered by Tortis-INTL as it is not intendedto list Tortis-INTL on a stock exchange.Moneys to fund redemption come from a debtpool of approximately 5% of the fund and not,except in extraordinary circumstances, frompartial realisation of the share portfolio. In theunlikely event that Tortis-INTL needs to realisepart of the share portfolio to fund redemptions,that realisation would occur in accordance withthe weighting of the Tower Global Index. Anysale by Tortis-INTL would be calculated at sucha level as to restore liquidity to the debt pool.Tortis-INTL will only invest the debt pool inbank deposits with banks registered under theReserve Bank Act 1989 or other debtobligations or in the Tower First Rate Account.

11 Investors wishing to subscribe for units abovea certain prescribed level may do so bytransferring to Tortis-INTL an appropriatelyweighted basket of securities, and will receiveunits in Tortis-INTL in exchange. Equally,investors holding units in excess of aprescribed level will be able to redeem the units(both in the ordinary course of events andupon liquidation) in consideration for a transferby Tortis-INTL to them of an appropriatelyweighted basket of securities, rather than bycash payment.

12 Unit prices may be published in newspapersand Tortis-INTL will have an Internet site whichwill be used principally to publish prices atwhich the manager will repurchase or redeemunits, and as a means for transferring units onlyby purchase from the manager, and redemptionor repurchase by the manager.

The MSCI World Index

13. The Tower Global Index is a customised versionof the MSCI World Index.

14. The fundamental objective of the MSCI WorldIndex is as follows (taken from the MSCIMethodology and Index Policy document,published by MSCI in March 1998, at page 3):

MSCI Indices are constructed to provide benchmarksthat accurately represent the opportunities available tothe institutional investor. While an all-share-index (alllisted companies at their full market cap weight)represents the theoretical opportunity set available tothe global investor, this is not a fair performancebenchmark in practice, since it cannot be fullyreplicated due to illiquidity of either shares or volume.Thus, MSCI creates indices which capture the spirit ofan all-share index, but are actually subsets of shares

which are truly replicable.

15. The rules for determining which companies willbe included in the MSCI World Index are setout below (taken from the MSCI Methodologyand Index Policy document):

MSCI produces a world index which currently (31 May2000) comprises 22 countries and over 1,300 stocks.Each country included in the MSCI World Index isrepresented by a separate index which forms part ofthe larger Index. The index for each country is referredto as a MSCI Country Index.

In constructing the MSCI Country Indices MSCI uses afive-step process.

MSCI Country Index Selection Criteria:

1. Define the total market.

2. Sort the market by industry groups and target 60%for inclusion.

3. Select stocks with good liquidity and free float.

4. Avoid cross-ownership.

5. Apply the full market capitalization weight toeach stock.


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1. Define the total market: The initialresearch for the MSCI Indices covers the full breadthof each equity market in the universe. Countryspecialists track the evolution of both listed andunlisted shares of domestically listed companies in 51markets that, combined, account for over 90% of theworld’s total market capitalization. Based in Geneva,these teams of country specialists collect data onshares, pricing, ownership, float and liquidity foreffectively all companies worldwide. Sources for thisinformation include local stock exchanges andbrokerage firms, newspapers ad company contacts. Allof the companies within this research coverage areeligible for inclusion in the MSCI Indices except non-domiciled companies, investment trusts and mutualfunds.

2. Sort the total market by industry groupsand target 60% for inclusion: Once information onthe total country market capitalization is analyzed,60% of the capitalization of each industry group, andthus 60% of the entire market, is targeted for inclusionin each MSCI country index. This process ensures thatthe index reflects the industry characteristics of theoverall market, and permits the construction ofaccurate regional and composite industry indices.

With the uniform target of capturing 60% of the eachcountry’s total market capitalization, each countrycarries its proportional weight in the regional andcomposite indices. A 60% target has been foundsufficient to maintain a high level of tracking whilestill providing for an investable universe across allcountries (the “highest common denominator” whichcan be captured, while still having an investable indexin each country).

3. Select stocks with good liquidity and freefloat: A goal of the MSCI index construction processis to select the most liquid stocks within each industrygroup, all other things being equal, since liquidity isnecessary but not the sole determinant for inclusion inthe index. Liquidity is monitored by monthly averagetrading value over time in order to determine normallevels of volume, excluding temporary peaks andtroughs. A stock’s liquidity is significant not only inabsolute terms, but also relative to its marketcapitalization and to average liquidity for the countryand the industry as a whole. Liquidity is not used as anabsolute measure to select constituents because: Anabsolute minimum level of liquidity would be arbitraryand would have different meanings in differentmarkets.

Liquidity is partly a function of the cyclicality ofmarkets and industries. Limiting index constituents toonly the most liquid stocks would introduce a biasagainst those stocks and sectors that are temporarilyout of favor with investors. An inflexible rule mightalso dictate a pattern of constituent additions anddeletions that would introduce unnecessary turnover inthe index.

The free float (percentage of shares freely tradable) ofevery security in the market is monitored and anestimate is calculated, and low float may exclude astock from consideration in the index. In thedeveloped markets and some emerging markets, “low”float is considered under approximately 25%, asestimated by the country specialists at CIPSA inGeneva. However, in many emerging market countries,the average float is below 25%, so float is measuredrelative to the stock’s own industry and country.

But float can be a difficult number to determine. Insome markets, reliable data sources are generally notavailable; in other markets, information on smaller andless prominent issues can be subject to error and timelags. Additionally, government ownership andcorporate share crossholdings can change over timeand are not always made public. The precise definitionof “float” also tends to differ depending on the datasource. Thus, evaluations of float run the risk ofpenalizing those markets that have higher standardsfor company disclosure, regardless of the actual degreeof availability of shares. As with liquidity, sufficientfloat is an important consideration, not an inflexiblerule.

4. Avoid cross-ownership: Cross-ownershipoccurs when one company has a significant ownershipstake in another company, and both are included in theindex. Substantial cross-ownership can skew industryweights, distort country-level valuations (such as Price/Earnings and Price/Book Value) and overstate acountry’s true market size.

An integral part of the index construction process is toidentify corporate share crossholdings in order to avoidor minimize cross-ownership in the MSCI Indices.Country analysts in Geneva separate cross-ownershipstakes into two categories. The first consists of stakeswhich are considered immaterial. In these cases, suchcross-ownership does not represent somethingsignificant in terms of having distortionary effects onthe index even if both companies are included. Thesecond category is stakes which could materially distortan industry- or country-level index by significantlyoverstating the index’s market capitalization if bothcompanies are included. Other ownership stakes (suchas government, family, other institutional holdings) arealso included in the estimated free float.

5. Apply the full market capitalizationweight to each stock: All standard MSCI indices areweighted by each company’s full market capitalization(both listed and unlisted shares). This approach has theadvantage of objectivity—the number of sharesoutstanding is consistently defined for companiesaround the world and is a readily obtainable figure. Thisapproach also minimizes turnover. MSCI does notadjust share weights for either free float or cross-holdings. The most serious consequence of floatlimitations is illiquidity, which can be monitoredobjectively. Full market capitalization weighting isfavored to float-weighting schemes for boththeoretical and practical reasons:

• It is impossible to judge whether a position whichis currently in firm hands might be available in thefuture.

• The quality and timeliness of information on floatvaries from market to market. Adjustmentspenalize those markets with the highest standardsof company information disclosure.

• Float adjustments incur index turnover as the floatof a company changes. However, the precision ofa float-adjusted index may not yield a more“investable” index. For instance, when the float ofa stock increases from 55% to 60%, it may not benecessarily 5% more investable on a practicalbasis. In fact, it was probably fully replicable at afull market cap weight and the increase in turnoverdid not result in a “better” index, only an increasein transaction costs.


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• Float adjustments on a country level may notresult in materially different country weights from

market capitalization weights.

[Weighting stocks at their full marketcapitalisation, as described below in the fifthselection criterion, is slowly being phased outby MSCI: first by its extension of the partialinclusion policy to all new additions to itsindices (as of 31 July 2000) and second, by thechange in its index construction methodologyto a free float-adjustment methodology.However, currently stocks which were alreadypart of the index as at 31 July 2000 are includedat their full market capitalisation.]

Partial Inclusion Policy

Since the normal MSCI index policy is to include indexconstituents at 100% of market capitalization, largeissues with low float—a characteristic of manyprivatizations—pose a dilemma for index construction.Including such companies at full market cap weight canoverwhelm an index and overstate the true size ofmarket opportunities; yet excluding them also resultsin an incomplete picture of the market. A company isincluded or excluded on a case-by-case basis, where thecontributing factors include the expected change infloat (especially for first-time governmentprivatizations), stability of the liquidity andimportance of the company in its local economy.

A growing number of very sizable companies have beenor will be brought to market with modest tranchesinitially made available to the public. By virtue of theirsize and visibility, these companies are obviouscandidates for inclusion in a portfolio. To reflect thisnew market trend, MSCI index construction rules doallow for the possibility of including a company at aportion of its total market capitalization. This occursonly in exceptional cases when very large companiescome to market with very modest initial float.

In July 31 2000 the policy on partial inclusions wasamended. MSCI has extended the application of itspolicy on partial inclusion of companies to all newadditions to the MSCI indices. This amendment willsimplify the partial inclusion policy, providingconsistent treatment for all new index additions.Previously, the policy was targeted only at newconstituents with very large market capitalizations.This amendment does not affect existing constituentsin the MSCI indices.

Following this amendment, all companies with a floatbelow 40%, that are to be added to the MSCI Standardor Extended indices, regardless of size, will be includedat a fraction of their total market capitalization usinga Market Cap Factor (MCF). The MCF will bedetermined using MSCI’s current schedule as shownbelow:

% Float equal 10 15 20 25 30 35 40or exceeding*

% Market Cap 20 30 40 50 60 80 100Factor (MCF)

* Over-allotment option is not included in the case ofIPOs, privatizations and similar public offerings.

Structural Changes

In changing the constituents of the MSCI Indices,accurate representation is balanced with minimizingturnover. An index must represent the current state ofan evolving marketplace while at the same timeminimizing turnover, which is costly as well asinconvenient for investment managers. Restructuringan index involves a balancing of constituent additionsand deletions. The primary concern when consideringadditions and deletions is the continuity of the indices.Of secondary concern are the turnover costs associatedwith these changes.

There are two broad categories of changes to the MSCIIndices: structural changes and market-driven changes.

Structural changes reflect the evolution of a marketdue, for example, to a change in industry compositionor regulations. Industry restructurings generally takeplace every 18 to 24 months for any given country.However, the structural change to the country indexmay occur on only four dates throughout the year: asof the close of the last business day of February, May,August and November. MSCI index additions anddeletions are announced two weeks in advance. Thereare absolute firewalls on any price-sensitive decisionuntil there is a public announcement. These changesare communicated to subscribers both electronicallyand by fax. They are simultaneously posted on publicReuters pages (starting on MSCIA) and publicBloomberg pages (MSCN). The Reuters and BloombergMSCI pages are updated by Capital InternationalPerspective, S.A. in Geneva. The pages include thesecurity names, the action to be taken and, whennecessary, the context of the change.

A more detailed announcement service is available fora fee (and provides the weightings, shares outstanding,security identifiers and industry classification).

During the examination of each country index, themarket cap and business function coverage of eachindustry group is measured against the underlyingmarket. The investability (free float, cross-ownership,long- and short-term trading volume and turnover) ofeach constituent is also monitored. In the event thatan industry is over- or under-covered, or that there arestocks in the index which are no longer investable(here both long-term and short-term liquidity isexamined), or a large privatization has altered thecapitalization of the market, a structural change maybe necessary.

The MSCI indices reflect the opportunity set to theglobal investor on an ongoing basis—and should thusmirror the fundamental changes in the market’sstructure, and correspond to the situation of theaverage institutional investor. These structural changesare designed and timed to minimize turnover to theindices. If possible, several unrelated changes to acountry index are grouped together, minimizingdisruption.

Structural Change Additions: As markets growbecause of privatizations, investor interest, or therelaxation of regulations, index additions (with orwithout corresponding deletions) may be needed tobring industry representations up to the 60% target.Companies are considered not only with respect totheir broad industry, but also with respect to their sub-sector, in order to represent if possible a broader rangeof economic activity.


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Structural Change Deletions: The indices mustrepresent the full-investment cycle, including bear aswell as bull markets. Out-of-favor stocks may exhibitdeclining price, market capitalization, and/or liquidity,and yet continue to be good representatives of theirindustry. Deleting constituents because their liquidityhas declined introduces a bias against out-of-favorcompanies or industries, especially those in the troughof a business cycle. For this reason, low liquidity isnever an automatic trigger for deleting a companyfrom the index.

Companies may be deleted because they havediversified away from their industry classification,because the industry has evolved in a differentdirection from the company’s thrust, or because abetter industry representative exists (either a new issueor an existing company). In addition, in order not toexceed the 60% target coverage of industries andcountries, adding new index companies may entailcorresponding deletions.

Market-driven Changes

Market-driven changes consist of new issues, mergers,acquisitions, bankruptcies, and other similar corporateevents. These changes are announced and implementedas they occur.

Additions - New Issues: New issues may not beautomatically eligible for immediate inclusion in theMSCI Indices. Many factors must be considered, suchas market capitalization, float and liquidity. Some newissues undergo a seasoning period of six to twelvemonths between index restructurings until a tradingpattern and volume are established. After that time,they are eligible for inclusion, subject to the standardselection criteria discussed.

However, sometimes a new issue, usually aprivatization, comes to market and substantiallychanges the country’s industry profile. In this case,where even temporarily excluding it would distort thecharacteristics of the market, it may be immediatelyincluded in the MSCI Indices. An example is YPF,Argentina’s privatized oil company, which at USD 3.04billion is Latin America’s largest privatization to date.In these cases, however, an announcement is made inthe first few days of official trading for the security,since the country specialists do not want to influencethe primary placement of the issue.

In other cases, a large new issue may not be includedeven in the normal process of restructuring, despitesubstantial size and liquidity. The primary reasons fornon-inclusion of a large new issue are as follows:

• A large stock, if it has low float and is also illiquid,can overwhelm an index and over-represent thetrue opportunities in the market.

• The index may be at the limit of industryrepresentation—including the new issue wouldseriously over-weight an industry in the index.

• In some cases, it is necessary to defer inclusion ofa new issue until the next opportunity for indexrestructuring.

Deletions - Suspended Companies: In the case ofsuspension for bankruptcy or near bankruptcy, thesuspended company is deleted at the smallest price(unit or fraction of the currency) at which a securitycould have traded in a given market.

More complex are the cases where the suspension isdue to a major restructuring, which results in thecompany being ineligible (at least for an importantperiod of time) for normal listing and trading on thestock exchange. The MSCI policy is to remove thesecompanies from the index only after there is littlelikelihood the company will return to normal trading.In this situation, the key issue is determining the priceat which the company can be removed from the index.Unofficial market prices may be used as a base todetermine that exit price. In exceptionalcircumstances, average indicative prices from reliablesources may be used.

Mergers & Acquisitions: Any case of mergers andacquisitions, or capital restructuring, which can affect acompany within the MSCI universe is monitored.Depending on whether the active companies are, or arenot, constituents of the MSCI Indices, a number offactors must be considered. If either the acquiring orthe acquired firm is a constituent of the index, the firstconsideration is the impact of the acquisition on theindex. The second consideration involves structuralchanges to the index. When a non-constituentcompany acquires a constituent company, either theacquiring company can replace the constituentcompany in the index, or another company altogethermay be chosen as a better representative of theindustry. If two medium-sized, non-constituentcompanies merge, the merged company may also beconsidered for inclusion in the indices. However, thischange would occur only through a structural review.

Spin-Offs: A spin-off is the distribution to existingshareholders of a part of the company’s businessthrough the issuance of shares in the newly-establishedcompany. The decision to include the newly-established company in the index is based on severalfactors including estimated market value, marketcapitalization, and float. The market value of the spin-off is estimated through a consensus of industryanalysts, grey market prices, and statistics on revenuesand earnings.

Performance of stocks

The methodology for determining which stocks are tobe included in the relevant country indices does notinvolve any exercise of predicting whether a companyis likely to be particularly profitable or unprofitable orwhether the company’s securities are likely to increasein value or decrease in value. Performance is not anissue. MSCI is solely focused on ensuring that aconsistent methodology is used in preparing theindices, which maximises the utility of the indices as arecognised world-wide benchmark of stock marketmovement and avoids unnecessary turnover of index

stocks.

Upcoming MSCI Changes

16. In addition to the process stated above, thereare also upcoming changes which alter the wayin which the MSCI World Index will select itsconstituent company securities. The MSCI willadjust all its equity indices for free float andincrease the target market representation of itsStandard Index series from 60% to 85%. Thecombined changes will be implemented in twoseparate phases. The first phase will beimplemented as of the close of 30 November 2001and the second phase will be implemented as of


23

the close of 31 May 2002. MSCI plans topublish index constituents and their InclusionFactors on or before 30 June 2001, and willbegin calculating a provisional index seriesbased on the enhanced methodology shortlythereafter.

17. The change in index construction methodologyto a “free float-adjustment” methodology isdescribed in the MSCI Announcement, dated10 December 2000 (“the Announcement”), asfollows:

MSCI calculates the free float of an equity security asits total number of shares outstanding lessshareholdings classified as strategic and sharesotherwise restricted from trading by internationalinvestors. Examples of shares excluded from free floatare stakes held by governments, corporations,controlling shareholders and their families, thecompany’s management, and shares subject to foreignownership restrictions.

Under this enhanced index construction methodology,MSCI will free float-adjust constituent weights using anadjustment factor, which will be referred to as theInclusion Factor. This Inclusion Factor is equal to aconstituent’s estimated free float rounded-up to theclosest 5%. For example, a constituent with anestimated free float of 23.2% will be included in theindex at 25% of its total market capitalization, while aconstituent with an estimated free float of 78.6%, willbe included in the index with an Inclusion Factor of0.80. Where the foreign ownership limit is morerestrictive than the free float, and if there are noforeign strategic investors, a constituent’s InclusionFactor will be equal to its exact foreign ownershiplimit, rounded to the nearest percentage point.

Securities with a free float below 15% will not typicallybe eligible for inclusion in the MSCI equity indices.However, in exceptional cases where including such asecurity would significantly improve the index’s abilityto accurately represent the investment opportunitiesin that country or industry, the security may beincluded in the MSCI indices with an Inclusion Factorequal to its estimated free float rounded to the closestpercentage point. For example, a very large companywith an estimated free float of 11.4%, if included inthe index, would be included with an Inclusion Factorof 0.11.

In order to account for other types of restrictions onforeign equity investment, such as the investorqualification and quota approval system prevailingtoday in Taiwan, the enhanced MSCI methodologyprovides for an additional investability factor, referredto as the Limited Investability Factor. The applicationof this Limited Investability Factor would permit amore accurate comparison of markets with morecomplex and subtle restrictions to the investmentprocess with markets where investment limitations canbe appropriately reflected in security specific InclusionFactors.

MSCI will review constituents’ Inclusion Factors at thetime of regular country index rebalancings. Inaddition, MSCI will allow for changes in a security’sInclusion Factor in response to significant market-driven corporate events, as the events become

effective.

18. To determine whether a shareholding isstrategic or non-strategic, the followingguidelines are used:

Shareholding classification guidelines

MSCI primarily classifies shareholdings as strategic ornon-strategic based on a categorization of investortypes.

• Strategic shareholders: The following investortypes are generally considered as strategic and theirshareholdings in a company are not included inthat company’s equity capital to determine its freefloat:

• Governments: Shares owned by governments andaffiliated entities. Please refer to the specificguidelines described below for government agenciesand government-related investment funds.

• Corporations: Shares owned by corporations,including treasury shares owned by the companyitself, except when the treasury shares are excludedfrom the number of shares outstanding. Pleaserefer to specific guidelines for banks.

• Management and Board Members: Sharesowned by members of the company’s managementor Board of Directors, including shares owned byindividuals or families that are related to or closelyaffiliated with members of the company’smanagement, Board of Directors, or foundingmembers deemed to be insiders.

• Employee Stock Ownership Plans (ESOPs):Shares owned in ESOPs during the lockup period.

Non-Strategic shareholders: The followinginvestor types are generally considered as non-strategicand their shareholdings in a company are included inthat company’s equity capital to determine its freefloat:

• Individuals: Shares owned by individuals,excluding shares owned by individuals or familiesthat are related to or closely affiliated withmembers of the company’s management, Board ofDirectors or founding members deemed to beinsiders, and, excluding those shareholdings held byindividuals whose significant size suggests that theyare strategic in nature.

• Investment funds, mutual funds or unittrusts: Shares owned in investment funds, mutualfunds and unit trusts, including shares owned inpassively managed funds.

• Pension funds: Shares owned in employeepension funds, excluding shares of the employingcompany, its subsidiaries or affiliates.

• Insurance companies: In principle, theinvestment objective of portfolio holdings ofinsurance companies is non-strategic. When thereare reasons to believe that an insurance company’sshareholding is strategic, it will not be included infree float.

• Social security funds: Shares owned in socialsecurity funds, unless the fund’s management isdeemed to exert influence over the management ofthe company.

• Venture capital funds: Shares owned in venturecapital funds, unless a specific investment is

deemed to be strategic in nature.


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19. If the above guidelines are not sufficient, theadditional guidelines described below are used:

In the event that the above categories should notappropriately capture the nature of a specificshareholding, its classification as strategic or non-strategic will be determined based on a more extensiveanalysis. In particular, the following guidelines will befollowed:

• Banks. Shareholdings by banks are considered asstrategic, excluding, when identifiable, specificshareholdings that are deemed to be non-strategic.

• Nominees or trustees: Shareholdings registeredin the name of a nominee or trustee are classifiedas strategic or non-strategic based on an analysis ofwho is the ultimate beneficial owner of the shares,according to the above definitions.

• Government agencies and government-related investment funds: Shareholdings ofgovernment agencies and government-relatedinvestment funds are classified based on an analysisof the objective of the investment.

• Shares placed in IPOs with specialincentives: Shares that are placed in an IPO andthat include meaningful incentives to hold theshares for a specific period of time, are classified asstrategic until those incentives expire.

• ADRs and GDRs: Shares that are deposited toback the issuance of ADRs and GDRs are classifiedas non-strategic, unless it is established that aspecific stake held in ADRs or GDRs is strategic in

nature.

20. Other shares (other than those which areclassified as “strategic”) may also be excludedfrom the free float. These shares, describedabove as “shares otherwise restricted” from thefree float, are described as follows:

• Limits on share ownership for foreigners:Limits on the proportion of a security’s sharecapital that is authorized for purchase by non-domestic investors. Where they exist, theseforeign share-ownership limits are generally set bylaw, government regulations, or company by-laws.

• Other foreign investment restrictions:Investment restrictions, other than those describedabove, which materially limit the ability ofinternational investors to freely invest in aparticular equity market. There is typically nosimple way to account for these limitations in abenchmark, as these restrictions tend to be moresubtle and complex, and may affect different

market participants in different ways.

21. The MSCI calculates the free float-adjustmentconstruction methodology in the followingmanner:

Calculation of a security’s free float-adjustedmarket capitalization

As a general rule, MSCI calculates the free float of asecurity as its total number of shares outstanding lessshareholdings classified as strategic and sharesotherwise restricted from trading by internationalinvestors. However, the determination of thecorresponding free float-adjusted market capitalizationis dependent on the nature of the limitations on freefloat.

In all cases, the calculation is based solely on publiclyavailable shareholding information obtained frommultiple information sources. For each security, allavailable shareholdings are considered where public datais available, regardless of size.

• Calculation in the case of a security which isnot subject to a foreign ownership limit orother foreign investment restrictions

• Strategic shareholding (%) =

Number of shares classified as strategicTotal number of shares outstanding

• Free float (%) = 100% - Strategic shareholding (%)

• For constituents with free float greater than orequal to 15%, the security’s Inclusion Factor isequal to its estimated free float, rounded-up to theclosest 5%.

• Securities with free float less than 15% aretypically not eligible for inclusion in the indices.However, in exceptional cases, where includingsuch a security would significantly improve theindex’s ability to accurately represent theinvestment opportunities in that country orindustry, the security may be included in the indiceswith an Inclusion Factor equal to its estimated freefloat rounded to the closest 1%.

• Free float-adjusted market capitalization =Inclusion Factor * total market capitalization

• Calculation in the case of a security which issubject to a foreign ownership limit

• Foreign strategic shareholding (%) =

Number of shares held by foreign strategic investorsTotal number of shares outstanding

• Free float available to foreign investors (%) isequal to the lesser of:

• the free float, calculated as: 100% - strategicshareholding (including both foreign anddomestic strategic shareholders) (%)

• the foreign ownership limit less the foreignstrategic shareholding (%)

• For constituents whose free float available toforeign investors is greater than or equal to 15%,the security’s Inclusion Factor is equal to the lesserof:

• the estimated free float available to foreigninvestors rounded-up to the closest 5%;

• the foreign ownership limit rounded to theclosest 1%.

• Securities with a free float available to foreigninvestors of less than 15% are typically noteligible for inclusion in the indices. However, inexceptional cases, where including such a securitywould significantly improve the index’s ability toaccurately represent the investment opportunitiesin that country or industry the security may beincluded in the indices with an Inclusion Factorequal to its estimated free float available to foreigninvestors rounded to the closest 1%.

• Free float-adjusted market capitalization =Inclusion Factor * total market capitalization

• In the case of a security which is subject toother foreign investment restrictions


25

In the case where other foreign investment restrictionsexist, which materially limit the ability ofinternational investors to freely invest in equitymarkets, an additional Limited Investability Factormay be applied. There is typically no simple way toaccount for these types of investability limitations in abenchmark as they tend to be subtle and complex, andmay affect different market participants in differentways. Therefore, where warranted, the LimitedInvestability Factor will be determined based on an

extensive case-by-case analysis.

22. The change in target representation, asdescribed in the Announcement, will occur asfollows:

In conjunction with the free float-adjustment of itsindices, MSCI will increase the target marketrepresentation in the MSCI Standard Index series from60% of total market capitalization to 85% of freefloat-adjusted market capitalization within eachindustry group within each country. Given trends suchas increased market concentration, the increase incoverage will provide greater diversification andrepresentation of investment opportunities in theindices. Broader coverage is also expected to decreaseongoing turnover in the MSCI indices.

MSCI research shows that the increase to a targetmarket representation of 85% can be achieved withthe addition of a reasonable number of relatively liquidand sizeable constituents in most countries. In thecountries where this is not possible, the country indexwill remain below the target market representation of

85%.

23. The “phase in” periods, also detailed in theAnnouncement, for the changes are as follows:

Publication of Constituent Data andImplementation

In order to assist market participants in understandingand preparing for these changes, MSCI plans topublish, on or before June 30, 2001, the list of indexconstituents and their Inclusion Factors under theenhanced methodology for each of the MSCI Standardcountry indices. In addition, shortly thereafter, MSCIwill begin publishing a provisional index series tomeasure the performance of the MSCI countries andmain regions based on the enhanced methodology.The provisional series, together with the constituentsand their Inclusion Factors, also may be used by clientswho wish to measure their performance against such anindex, ahead of MSCI’s official implementationschedule.

In order to best transition the indices to the enhancedmethodology, the combined changes will beimplemented in two separate phases: as of the close ofNovember 30, 2001, and as of the close of May 31,2002. The changes in each phase will simultaneouslyaffect all MSCI Standard country indices and willinclude changes resulting from both the free float-adjustment and the increase in coverage. In the firstphase, approximately half of the total change resultingfrom the free float-adjustment will be implemented forall existing index constituents and, simultaneously, allthe new constituents resulting from the increase incoverage to 85% will be added at approximately half oftheir free float-adjusted market capitalization.

More specifically, in the first phase, the marketcapitalization of all existing index constituents will beadjusted by an interim Inclusion Factor equal to thesimple average of the current proportion of marketcapitalization included in the index prior to the changeand their final Inclusion Factor. This average will berounded up to the closest 5% (or closest 1% if below15%). For example, in the first phase, twoconstituents with free floats of 23.2% and 78.6%,respectively, currently included in the index at theirfull market capitalization weights, will have theirmarket capitalization adjusted by interim InclusionFactors of 0.65 and 0.90, respectively. These interimInclusion Factors are calculated as (25%+100%)/2 =62.5%, rounded-up to 65%, and (80%+100%)/2 =90%, respectively.

Simultaneously, all the new constituents resulting fromthe increase in coverage to 85% will be added to theindices in the first phase with interim Inclusion Factorsequal to half of their final Inclusion Factors rounded-upto the closest 5% (or 1% if below 15%). For example,in the first phase, two new constituents with free floatsof 23.2% and 78.6%, respectively, will be included inthe indices with their market capitalization adjusted byInclusion Factors of 0.13 (25%/2 = 12.5%, rounded-upto 13%) and 0.40 (80%/2 = 40%), respectively.

In the second and final phase, the remainingadjustment to market capitalization of all constituentsecurities will be implemented.

Index Rebalancings and Market Events duringthe Transition Period

During the transition period, from December 11, 2000through May 31, 2002, MSCI will maintain its scheduleof regular quarterly index rebalancings for its StandardIndex series. To minimize changes not related to thetransition, MSCI will seek to coordinate all changes inthe Standard indices with the target index under theenhanced methodology (i.e., the provisional serieswhen available.) In addition, MSCI will only considervery significant changes in the equity markets whenperforming its quarterly index reviews.

All new additions of companies resulting from IPO’sand regular quarterly rebalancings will be included withtheir final Inclusion Factors.

Also, during the transition period, important newmarket capitalization additions resulting from mergers,acquisitions and similar corporate events, in principlewill be made in proportion to the free float of theadditional market capitalization entering the index.For example, when a company - with a currentinclusion factor of 40% - issues new shares for theacquisition of assets entirely in firm hands for theequivalent of 25% of its current share capital, theresulting inclusion factor will be derived from thefollowing calculation: [(100 x 40%) + (25 x 0%)] /

125 = 32%, which will be rounded up to 35%.

24. Further details of the Arrangement are asdescribed in and applicable to Binding RulingPrd 96/34.


26

Conditions stipulated by theCommissionerThis Ruling is subject to the following conditions:

(a) any cancellation of units by Tortis-INTL will bein whole but not in part; and

(b) Tortis-INTL will either have not less than 100unit holders, or any lesser number of unitholders will be due to unusual or temporarycircumstances (including the recentestablishment of the trust); and

(c) the units will be issued on terms such that theirredemption is subject to sectionCF 3(1)(b)(iv)(B); and

(d) in relation to amounts paid as consideration fora cancellation upon liquidation, the recipientwill not be a person that is related toTortis-INTL within the meaning of section CF3(12); and

(e) at the date of redemption there is noarrangement for the units redeemed to bereplaced by the subsequent issue of new unitswhere the arrangement is intended to effect asubstitution for the payment of dividends; and

(f) index sampling will only take place in the initialstages of Tortis-INTL but not after the time thatthe fund reaches a size of NZ$60 million; and

(g) financial derivatives will be used only toequitise relatively small balances anticipated tobe less than 5% of the total fund. Thesederivatives will not be shares and will not beoptions to buy shares. They will be financialarrangements. Any gain on them will beassessable for income tax purposes andlikewise any loss will be deductible; and

(h) Tortis-INTL and any company in the Towergroup of companies will not be a “whollyowned group” as that term is defined insection IG 1(3); and

(i) In relation to the application of section CG 1(a),none of the features listed in Part B ofSchedule 3 will be applied by any relevantcompany (shares of which are acquired) and

(j) Section CG 6 will apply to Tortis-INTL.

How the Taxation Laws apply tothe Applicant and theArrangementSubject in all respects to any conditions stated above,the Taxation Laws apply to the Applicant and theArrangement as follows.

• If a unit holder redeems units in Tortis-INTL(whether for cash or an appropriately weightedparcel of shares in the Index companies),section CF 3 (1)(b) will apply and thedistribution made by Tortis-INTL will not be adividend to the extent that the amountdistributed does not exceed the “availablesubscribed capital per share cancelled”, as thatterm applies to Tortis-INTL. The Commissioneris satisfied that in terms of section CF 3(1)(b)(iii) the distribution is not in lieu of thepayment of dividends. The procedure ofpublicising buy-back and redemption prices onthe Internet does not constitute a “recognisedexchange” in terms of the definition of thatphrase in section OB 1.

• If Tortis-INTL is liquidated section CF 3 (1)(c)will apply. The amount distributed to unitholders will not be a dividend to the extent thatit does not exceed the aggregate of the“available subscribed capital per sharecancelled” and the “excess return amount” asthose terms apply to Tortis-INTL. The excessreturn amount will include gains on shares soldby Tortis-INTL.

The period or income year forwhich this Ruling appliesThis Ruling will apply for the period from 1 April 2001until 30 June 2001.


Martin Smith



27


4 In the event that the Fund will have to realisepart of the share portfolio to fund redemptions,that realisation will occur in accordance withthe weighting of the Index.

5 Approximately 5% of the Fund is invested in acash pool. This part of the investment willprovide a readily realisable pool of funds fromwhich to pay liabilities and fund redemptions.The Fund only invests the cash pool in bankdeposits with a bank registered under theReserve Bank Act 1989, any debt obligations orin the Tower First Rate Account.

6 Apart from shares acquired to establish andgrow the Fund and the investment of the cashpool, any powers of investment or divestmentby the trustee under the Deed of Trust areexercised for the purposes of (i) reflectingmovements in the Index in terms of compositionand weighting; or (ii) funding the redemption ofunits in the Fund (or to restore liquidity to thecash pool to enable the Fund to fund theredemption of units).

7 Cash dividends received by the Fund (less anytax payable on them not covered by imputationcredits) are passed on to the investors twiceannually or retained by the Fund in order torestore liquidity to the cash pool.

8 Investors are able to subscribe for units in theFund by making a cash payment. It will bepossible for investors to transfer to the Fund aparcel of shares in the Index companies (asspecified by the Manager) proportionate to thenumbers and classes of shares of the Indexcompanies included in the Index.

9 Investors are able to redeem their units at anytime by giving notice, in the form of arepurchase request, to the manager. Their unitswill be redeemed in cash at a price equal to thenet assets of the Fund at the time divided bythe number of units on issue.

10 It is possible for the manager to purchase theunits from the unit holders as an alternative toredemption. Where units are repurchased themanager will pay the unit holder a price equal tothe net assets of the Fund at the time dividedby the number of units on issue.

11 Instead of redeeming or repurchasing the unitsfor cash the unit holder may request the trusteeto transfer to the unit holder a parcel ofshares in the Index companies proportionateto the numbers and classes of shares of theIndex companies included in the Index.


Name of the Person whoapplied for the RulingThis ruling has been applied for by Tortis-NZ Fund.


This Ruling applies in respect of sections CF 3 (1)(b)and CF 3 (1)(c).

The Arrangement to which thisRuling appliesThe Arrangement is the establishment and continuedoperation of the Fund under the terms of the Deed ofTrust, dated 1 November 1996 to act as an investmentfund to hold a portfolio of shares that match thecomposition and weighting of the NZSE30 SelectionCapital Index (“the Index”).


1 The trustee of the Fund is the Public Trustee.The manager of the Fund is Tower ManagedFunds Limited. The Fund has been establishedas a unit trust in terms of the Unit Trusts Act1960 and meets the definition of a “unit trust”contained in section OB 1. The beneficialinterest in the Fund is divided into units. Eachunit (other than a fractional unit, which willconfer a proportional interest in the Fund)confers an equal interest in the Fund but doesnot confer any interest in any particular part ofthe Fund or any investment in the Fund.

2 Approximately 95% of the amount invested inthe Fund is used to invest in a portfolio ofshares. The investment policy of the Fund is toinvest in Index Companies in a manner thatreplicates the Index (apart from the transactionsrelating to the cash pool) and only enter intotransactions that give effect to that policy.

3 Apart from shares acquired to establish andgrow the Fund according to its terms, sharesare bought and sold by the Fund in only twolimited situations, namely where it is necessaryto (i) reflect movements in the Index in terms ofcomposition and weighting; and (ii) fund theredemption of units in the Fund (or restoreliquidity to the cash pool to enable the Fund tofund the redemption of units).


28

Where the unit holder receives a transfer ofshares the market value of the shares per unitwill be equal to net assets of the Fund at thetime divided by the number of units on issue.

12 The issuing of units and their redemption willbe effected directly by the Fund. Unit pricesmay be published in newspapers and the Fundwill have an Internet site through which visitorsto the site will be able to request the purchase,redemption or buy-back of units. No units areor will be otherwise quoted on the official list ofany “recognised exchange” as defined insection OB 1.

13 Any cancellation of units will only be effectedin order to allow unit holders to exit the Fund ordecrease their holding in the Fund. Units willalso be cancelled in the event that the Fund isliquidated.

14 Apart from on liquidation of the Fund, anycancellation of units will be in response to theactivities of a particular unit holder, and not allthe unit holders of the Fund.

15 Further details of the Arrangement are asdescribed in and applicable to Binding RulingPrd 96/34.

Conditions stipulated by theCommissionerThis Ruling is subject to the following conditions:

(a) Any cancellation of units by the Fund will be inwhole but not in part.

(b) The Fund will have either not less than 100 unitholders, or any lesser number of unit holderswill be due to unusual or temporarycircumstances (including the recentestablishment of the trust).

(c) In relation to amounts paid as consideration fora cancellation upon liquidation, the recipientwill not be a non-resident company that isrelated to the Fund within the meaning ofsection CF 3 (12).


• If a unit holder redeems units in the Fund(whether for cash or an appropriately weightedparcel of shares in the Index companies),section CF 3 (1)(b) will apply and thedistribution made by the Fund will not be adividend to the extent that the amountdistributed does not exceed the “availablesubscribed capital per share cancelled”, as thatterm applies to the Fund. The Commissioner issatisfied that, in terms of section CF 3 (1)(b)(iii),the distribution is not in lieu of the payment ofdividends.

• If the Fund is liquidated, section CF 3 (1)(c) willapply. The amount distributed to unit holderswill not be a dividend to the extent that it doesnot exceed the aggregate of the “availablesubscribed capital per share cancelled” and the“excess return amount”, as those terms apply tothe Fund. The excess return amount willinclude gains on shares sold by the Fund.

The period for which thisRuling appliesThis Ruling will apply for the period from 1 April 2001until 30 June 2001.


Martin Smith



29


3. IA’s asset base has been originally derived fromthe Auckland Regional Council (the “ARC”). In1992 the assets and liabilities of the ARC weretransferred to the Auckland Regional ServicesTrust (“ARST”) under Part XLIVB of the LocalGovernment Act 1974 (“LGA”). However,ARST did not inherit all the functions of theARC and its primary role was to manage itsassets, reduce the liabilities and dispose ofspecified assets as required under theprovisions of the LGA.

4. In 1998 the government decided that the assetsheld by ARST should be applied for developingthe Infrastructure of the Auckland region and itwas decided to create IA to facilitate thisdecision. Pursuant to section 707ZZZL of theLGA, on 1 October 1998 the assets andliabilities of ARST were transferred to IA, withthe following exceptions:

• $10 million was paid to the ARC for thepurposes of regional parks;

• $10 million was paid to the territorialauthorities of the Auckland region to beapplied to significant projects in theAuckland region in the area of arts andculture;

• the assets and liabilities of ARST in relationto the Pikes Point walkway were transferredto the Auckland City Council;

• the shares in Watercare Services Limitedwere divided between the territorialauthorities of the Auckland region.

The Making of Grants5. Section 707ZZL(1) of the LGA provides that

any local authority which, or other person who,intends to undertake within the AucklandRegion a project in respect of which IA maymake a grant in the exercise of its functionsunder section 707ZZK(1) may apply to IA forsuch a grant.

6. IA, in deciding whether or not to contributefunds to projects or parts of projects orcomponents of projects in the exercise of itsprincipal function under section 707ZZK, mustbe guided by the criteria specified in clause 5.2of the Infrastructure Auckland Deed, whichprovides:

5.2 Criteria: The criteria, in relation to each suchproject, are as follows:

(a) The extent to which the project generatesbenefits to the community generally in additionto those that accrue to any identifiable personsor groups of persons; and


Name of the Person whoapplied for the RulingThis Ruling has been applied for by InfrastructureAuckland.

Taxation LawAll legislative references are to the Goods andServices Tax Act 1985 unless otherwise stated.

This Ruling applies in respect of:

• Section 2

• Section 3A

• Section 5(1)

• Section 5(6D)

• Section 8(1)

• Section 10(2)

• Section 20(3)

The Arrangement to which thisRuling appliesThe Arrangement is the making of grants byInfrastructure Auckland (“IA”) on the basis ofapplications from potential recipients to carry outspecific transport or stormwater infrastructure projectswithin the Auckland region. Further details of theArrangement are set out in the paragraphs below.

Background1. IA is a body corporate which was established

pursuant to the Local Government AmendmentAct 1998, and the Infrastructure AucklandDeed.

2. Section 707ZZK(1) of the Local GovernmentAct 1974 provides that the principal function ofInfrastructure Auckland is to contribute funds,by way of grants, in respect of projects, or partsof projects, undertaken in the Auckland Regionfor the purpose of providing:

(a) Land transport; or

(b) Any passenger service; or

(c) Any passenger transport operation; or

(d) Stormwater infrastructure;

where the projects or parts of projects generatebenefits to the community generally in additionto any benefits that accrue to any identifiablepersons or groups of persons.


30

(b) The extent to which the benefits generated tothe community generally by the project exceedthe costs (including the external costs) of theproject by a margin greater than the assessed riskthat the project will not deliver its intended netbenefits; and

(c) Whether the project satisfies the requirements ofclause 4.1; and

(d) The extent to which the project contributes andgives effect to any Auckland Regional LandTransport Strategy or the Auckland regionalgrowth strategy or any regional policy statementor proposed regional policy statement adoptedunder the Resource Management Act 1991 orany regional stormwater strategy as adopted bythe Regional Growth Forum; and

(e) The principle that the costs of the project,

including the external costs, should be

(i) Allocated in a manner that is consistent witheconomic efficiency; and

(ii) Where practicable, recovered from thosepersons or groups of persons who—

- benefit from the project; or

- contributed to such costs; and

in a manner that matches the extent towhich those persons or groups of personsbenefit from the project or contributed to

such costs; and

(f) The extent to which the project will be in thebest interests of the inhabitants of the AucklandRegion; and

(g) The extent to which the project provides thegreatest benefit to the greatest number of peoplein the Auckland Region; and

(h) The extent to which the project provides for ageographical spread of public benefits across theAuckland Region; and

(i) The degree to which the project may improveeconomic performance in the Auckland Region;and

(j) The degree to which the project may contributeto regional environmental outcomes; and

(k) The degree of urgency for the project.

7. Clause 4.1 of the Infrastructure Auckland Deedsets out further matters which IA must haveregard to in making grants. It states:

Infrastructure Auckland must ensure that grants itmakes under section 707ZZK(1)—

(a) Are made primarily for the purpose of fundingthe capital components of projects; and

(b) Are not inconsistent with any Auckland RegionalLand Transport Strategy or the Aucklandregional growth strategy or any regional policystatement or proposed regional policy statementunder the Resource Management Act 1991; and

(c) Are made having regard to Transfund NewZealand’s funding policies; and

(d) Are not for services for which funding hasalready been identified. (As required by section

707ZZZA(1)(c))

8. The vast majority of the grants made by IAhave been made (and will continue to be made)to local authorities and commercial transportoperators who carry on taxable activities andmust account for GST in respect of suppliesthey make.

Terms and Conditions attachingto Grants

9. The grants IA makes are usually subject toterms and conditions.

10. IA has a broad discretion, pursuant to section707ZZL of the LGA, to make grants subject tosuch terms and conditions as IA sees fit.

11. However, in practice, there are three broadcategories under which IA will imposeconditions in relation to a grant. These are:

(a) Conditions which do no more than ensurethe efficient and proper application of thegrant funds, consistent with section707ZZK(1) and 707ZZL(2) of the LGA, aswell as other relevant statutoryrequirements, being one or more of thefollowing conditions:

(i) The grant recipient carrying out theproject as stated in the grantapplication;

(ii) The grant recipient obtaining anyadditional funding required to carryout the grant project (to the extent thatthe grant made by IA does notprovide sufficient funding);

(iii) The grant recipient obtaining allrelevant statutory and regulatoryconsents in respect of the project,such as resource consents, buildingconsents, local body and regulatoryauthority approvals;

(iv) The grant recipient obtaining allrelevant board and shareholderapprovals;

(v) The grant recipient entering into theprincipal contracts required tocomplete the relevant project;

(vi) The grant recipient establishing anappropriate entity to hold assets and/or carry out the project;

(vii) The grant recipient completing anydue diligence or further enquiry (ifappropriate) for the purpose ofensuring the feasibility of the project;

(viii) The grant recipient obtaining anyproperty rights that are necessary forthe project; and


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(ix) The grant recipient providing regularreports to IA at specified intervalsincluding information on the progressof the project and costs, adverseevents that have arisen, and theoutcome of the project following itscompletion.

(b) Conditions that ensure that the benefit ofthe grant is obtained by the Aucklandpeople and region; provided that in anysuch case any benefit connected with anyspecified person or group of persons isincidental to and/or a necessary andunavoidable result of generating benefitsto the community generally in theAuckland Region, being one or more ofthe following conditions:

(i) The grant recipient allowingcompetitors to use assets that arefunded by grants;

(ii) The grant recipient allowing generalpublic access to certain assets;

(iii) The grant recipient informing thepublic of the existence of the servicesassets or improvements (as the casemay be) arising from the grant project;and

(iv)The grant recipient acknowledging thecontribution of IA to the funding ofthe grant project.

(c) Conditions that are contingent on theoccurrence of some future event thatwould alter the assumptions inherent inmaking the grant, being one or more of thefollowing conditions:

(i) The grant recipient agreeing not to sellor dispose of its interest in assetsacquired or approved as part of aproject in respect of which a grant hasbeen made unless authorised by IA;

(ii) A condition providing that, if assetsare disposed of, those assets mustcontinue to be used in a manner thatwill deliver benefits to the AucklandRegion generally, whether by reason ofbeing transferred to a local authority, asubsidiary of a local authority, acompetitor or otherwise;

(iii) Rights to grants provided by IA maynot be assigned;

(iv)The grant applicant maintaining theproject for the life of the asset inaccordance with sound businesspractice;

(v) A right for IA to cancel a grant andrequire repayment of amounts paid inrespect of the grant if;

• the grant recipient cannot completethe project by the specified date; or

• the specified purpose for which thegrant was made cannot beachieved; or

• the grant was made in reliance oninformation that was incorrect ormisleading; or

• there are variations to the project towhich the grant funds were appliedthat are not authorised by IA;

(vi) The grant recipient ensuring that anyassets created as a result of the grantproject remain available to be used forthe benefit of the Auckland Regionwhere the grant recipient disposes ofits ownership of the assets or ceasesto use them for the purposes for whichthe grant was made; and

(vii) The grant recipient obtaining IA’sconsent prior to moving certain assetsto another physical location orchanging the ownership of suchassets.

Membership of IA12. IA is required to be operated by up to seven

“members” who are appointed in accordancewith the Infrastructure Auckland Deed. Themembers are responsible for the appointment ofthe Chief Executive Officer.

13. The members are appointed by a body knownas the Electoral College. The Electoral Collegeis established pursuant to the LGA and itsfunction is set out in section 707ZZT, whichprovides:

(1) The functions of the Electoral College are—

(a) To appoint, in accordance with this Act andthe Infrastructure Auckland deed, membersof Infrastructure Auckland:

(b) To appoint, in accordance with this Act andthe Infrastructure Auckland deed, thechairperson of Infrastructure Auckland:

(c) To discharge, in accordance with this Act andthe Infrastructure Auckland deed, its duties inrelation to Infrastructure Auckland’sstatement of corporate intent:

(d) To monitor the performance ofInfrastructure Auckland:

(e) To consult with the Minister from time totime about amendments to the InfrastructureAuckland deed:

(f) To carry out such other functions as are

conferred on it by this Act or any other Act.


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14. The Electoral College has eight members witheach of the Manukau City Council, theAuckland City Council, the Waitakere CityCouncil, the North Shore City Council, thePapakura District Council, the Rodney DistrictCouncil, the Franklin District Council and theAuckland Regional Council being entitled toappoint one member.

Central Government Involvementwith IA

15. The Minister of Local Government (“theMinister”) has a minor degree of involvementwith IA.

16. The Minister has been required to prepare andsign the Infrastructure Auckland Deed.In addition the Infrastructure Auckland Deedmay be amended from time to time by Order inCouncil made on the recommendation of theMinister after consultation with the ElectoralCollege.

17. Pursuant to clause 46.1 of the InfrastructureAuckland Deed, the Minister, in consultationwith the Electoral College, must, in the period of12 months ending with the close of30 September 2008, conduct a review of theactivities and future of IA for the purpose ofdetermining whether there is a continuing needfor IA to make grants under section 707ZZK(1).

18. In all other material respects, IA is totallydivorced from central government involvement.

Conditions stipulated by theCommissionerThis Ruling is made subject to the followingconditions:

a) No direct benefit to IA will arise in respect ofgrants made by IA except for a market ratereturn to compensate IA for temporary loss ofuse of funds where circumstances arise whichnecessitate repayment of a grant previouslymade.

b) Any benefit resulting from any project inrespect of which a grant is made which arises tospecified or identified persons or groups ofpersons is incidental to IA’s overall purpose ofproviding a benefit to the Auckland Regiongenerally.

c) No direct benefit will arise to any member oremployee of IA from any project in respect ofwhich a grant is made except in that member oremployee’s capacity as a member of thecommunity generally living in the AucklandRegion.

d) This ruling only applies in respect of grantsmade subject to no conditions, or subject toone or more of the conditions listed inparagraphs 11(a), 11(b), or 11(c) of theArrangement, and will not apply in respect ofany grant which contains conditions which arenot listed in paragraphs 11(a), 11(b), or 11(c).

e) The criteria specified in clause 5.2 of theInfrastructure Auckland Deed are the solecriteria that IA will use in determining whetherto offer a grant.

How the Taxation Law appliesto the ArrangementSubject in all respects to any assumption or conditionstated above, the Taxation Law applies to theArrangement as follows:

• The grant payments that the grant recipientsreceive from IA will not be deemed to beconsideration for a supply of goods or servicespursuant to section 5(6D).

• The grant recipients will not be required toaccount for GST pursuant to section 8(1) inrespect of the grant payments they receive fromIA.

The period or income year forwhich this Ruling appliesThis Ruling will apply for the period from 1 October1998 to 4 May 2004.


Martin Smith



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4. The leases are operating leases rather thanfinance leases for income tax purposes.

5. Employers find the Multi-lease productappealing because of its flexibility. There are nopenalties payable as a result of a customerchoosing not to take up a further lease of thevehicle concerned. At the expiry of each12-month period, lease obligations have beenmet under the Multi-lease product.

6. By comparison, Esanda imposes a significantpotential penalty for early termination under itsthree year lease (under clause 28 of the MasterLease Agreement, Esanda can determine theamount of the penalty).

7. The flexibility provided by the Multi-lease isparticularly valuable when employers areunsure of the number of employees for whomthey will require vehicles or are unsure of thetype of vehicle the employees may wish to haveavailable. As a result, the employers prefershort lease terms so that they are not requiredto continue either renting vehicles that they donot require or pay significant penalties for earlytermination.

8. The leasing of the motor vehicles by Esanda tocustomers/lessees (being, for the purposes ofthis ruling, the employers) comprises thefollowing steps:

(a) Initial lease enquiry

This is the initial contact from the potentialcustomer inquiring about leasing vehicles fromEsanda.

(b) Marketing response

This involves the initial meeting andconsideration of promotional material.

(c) Lease proposal

Esanda provides the customer with a “LeaseProposal”. This is not a contractual document.It is a strategic/informative document that setsout the general basis for the services thatEsanda can provide to customers, as lessees.

(d) Credit Application

The lessee’s credit application is completed andassessed.

(e) Motor Vehicle Leasing Terms andConditions

When a lessee commences dealings withEsanda, Esanda then provides the lessee with theMotor Vehicle Leasing Terms and Conditions.


Name of the Person whoapplied for the RulingThis Ruling has been applied for by Truck LeasingLimited trading as Esanda Fleet Partners (“Esanda”).


This Ruling applies in respect of sections BG 1, CI 3(1),GC 15, GC 17, and Schedule 2, Part A clause 1(c).

The Arrangement to which thisRuling appliesThe Arrangement is the leasing of motor vehicles byEsanda under Multi-lease agreements to employerswho provide the motor vehicles to employees for theirprivate use. The Multi-lease agreements involve amotor vehicle lease with a term of one year, with thepossibility of entering into two further terms of oneyear each. Further details of the Arrangement are setout in the paragraphs below.

1. Esanda conducts a fleet leasing business. Oneof the options offered to customers is a motorvehicle lease with a term of one year, with thepossibility of entering into two further terms ofone year each (“Multi-lease”).

2. The arrangement for which this ruling is soughtis the lease (using the Multi-lease product) of amotor vehicle from Esanda to an employer andthe provision of that motor vehicle by theemployer to an employee for their private useand enjoyment. The lease from Esanda to theemployer is made under the terms andconditions contained in the Master LeaseAgreement and Agreement to Lease (copies ofwhich were provided with the application dated14 December 2000). The Master LeaseAgreement states that the agreement isbetween the lessee and Mutual LeasingLimited.

3. Mutual Leasing Limited amalgamated withTruck Leasing Limited on 2 October 2000 andtherefore now operates under the name ofTruck Leasing Limited. As part of Esanda’scontractual obligations under the arrangement,it is required to advise employers of the marketvaluation of the vehicles.


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This is the Master Lease Agreement (“MLA”)which sets out the general terms and conditionsfor motor vehicles to be subsequently leasedfrom Esanda. There is no specific reference toactual vehicles in the MLA.

(f) Vehicle Order

The lessee then completes a “Vehicle Order”which details their precise requirements, forexample the vehicle, term, kilometres, andrelevant monthly lease rental etc. The VehicleOrder also incorporates the conditions in theMLA.

The Vehicle Order is completed prior to thecommencement of each new lease and reflectsthe details for that lease only.

(g) Acceptance

Esanda then confirms acceptance with thelessee.

(h) Agreement to Lease

Esanda and the lessee then enter into an“Agreement to Lease”. The terms andconditions set out in the MLA are incorporatedinto this lease agreement. In a contractualsense, the lease of each vehicle is clearlycreated by the offer and acceptance of eachspecific Agreement to Lease. The actual motorvehicle is then delivered to the lessee.

Under each and every Agreement to Leaseentered into between Esanda and a particularlessee, the following will apply:

• The term of the lease is 12 months.

• There will be no provision for automaticrenewal of the term of the lease.

• There will be no option conferred on thelessee to renew, extend or vary the term ofthe lease.

• There will be no provision for an incentiveto the lessee if it takes up a further lease ofthe vehicle.

• There will be no penalty on the lessee if itdoes not take up a further lease of thevehicle.

(i) Procedure at end of lease

As standard practice, Esanda advises thelessee of the status of the lease at least threemonths prior to the expiration of the 12-monthlease term. Esanda is then able to determinewhether the lessee wishes to lease the vehiclefor a further lease term of 12 months. If not, thevehicle is returned to Esanda upon expiry of thelease. If the lessee wishes to retain the vehicle,a new lease is entered into for a further12-month period. This new 12-month lease is

assigned a separate and distinct number orrecord in Esanda’s computer system, which isused to manage vehicles leased using its Multi-lease product. In all cases, the old record forthe previous 12-month lease is noted as havingterminated. In addition, a new Agreement toLease is executed for the further 12-monthlease. Again, the general conditions set out inthe MLA are incorporated into that newAgreement to Lease.

The rental rates for the second and thirdperiods are lower than the first. The ratesreduce as the depreciated value of the vehiclereduces. If the customer does not renew, itdoes not get the benefit of reduced rates.However, there is no obligation on Esanda toprovide vehicles for subsequent 12-monthleases and no obligation on customers to enterinto a subsequent 12-month lease.

(j) Valuation of Vehicles

As noted above, Esanda is required to adviselessees of the market value of the vehicle at thecommencement of each 12-month lease period.The market value assessment takes intoaccount the type of car and its condition andmileage. Esanda advises employers/lessees ofthe market valuation of the vehicles, and alsoprovides market value forecasts for subsequentperiods for indicative purposes only. Marketvalues are routinely reviewed prior to thecommencement of subsequent leases to ensurethat the forecasts are accurate.

Conditions stipulated by theCommissionerThis Ruling is made subject to the followingconditions:

a) The motor vehicles leased by the employersunder this Arrangement are leased for theprivate use or enjoyment of the employees ormade available for the private use or enjoymentof the employees.

b) Any rental rate for a subsequent lease period isthe same rental rate that would be offered toany other customer for that particular vehicleand lease period (taking into account thecustomer credit rating, customer fleet size,kilometre allowances, and general servicecomponents of the lease including vehiclemaintenance) irrespective of whether a previouslease for that vehicle was entered into by thatcustomer.


35

c) There is no other documentation, agreements,or contracts that concern or affect the terms ofthe leases entered into under this Arrangementapart from the MLA, the Vehicle Order, and theAgreement to Lease.

d) There is no contract, agreement, arrangement,plan, undertaking or understanding (whetherformal or informal, and whether intended to belegally unenforceable or not) that any party will,or will if requested, renew, extend or vary theterm of the lease.

e) There is no contract, agreement, arrangement,plan, undertaking or understanding (whetherformal or informal, and whether intended to belegally unenforceable or not) at the time ofentering into any lease under this Arrangement,that the parties will enter into a further lease inrespect of the vehicle.

f) There is no contract, agreement, arrangement,plan, undertaking or understanding (whetherformal or informal, and whether intended to belegally unenforceable or not) at the time ofentering into any lease under this Arrangement,that there will be penalties for choosing not toenter into a further lease in respect of thevehicle.

g) All calculations, factors, and/or projectionswhich are taken into account in formulating therental rates applying to each lease are not inany way based on a lease of the relevant motorvehicle for more than 12 months.

How the Taxation Laws apply tothe ArrangementSubject in all respects to any condition stated above,the Taxation Laws apply to the Arrangement asfollows:

• The market value of a motor vehicle under thisArrangement, for the purposes of calculatingthe fringe benefit value of that vehicle undersection CI 3(1) and Schedule 2, Part A clause1(c), is determined on the date on which eachnew 12-month lease commences.

• Sections GC 15 and GC 17 do not apply to theArrangement.

• Section BG 1 does not apply to negate or varythe conclusions above.

The period or income year forwhich this Ruling appliesThis Ruling will apply from the date this Ruling issigned until 3rd May 2004.


Martin Smith



36

NEW LEGISLATION

2000–2001 DEEMED RATE OF RETURN FOR FOREIGNINVESTMENT FUND RULES

The deemed rate of return used for the foreigninvestment fund (FIF) rules of the Income Tax Act 1994has been set at 10.29% for the 2000–2001 income year,down from 10.74% for the previous year. The rate willapply to all types of investments, including interests insuperannuation schemes and life insurance policies.

The FIF rules tax the income earned by foreign entitieson behalf of New Zealand residents, and apply toinvestments that are not subject to the controlledforeign company rules.

The deemed rate of return method is one of fourmethods for calculating FIF income or loss. The ratefor future income years will continue to be setannually.

The regulations setting the rate—the Income Tax(Deemed Rate of Return, 2000–01 Income Year)Regulations 2001—were made by Order in Council on25 June 2001.


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FINANCIAL PLANNING FEES – GST TREATMENT

IntroductionAll legislative references are to the Goods andServices Tax Act 1985 unless otherwise stated.

This statement considers the GST treatment undersections 3 and 14, of a range of services provided byfinancial advisers for financial planning fees chargedto investors. In this regard, the actual nature of theservices provided is important and will determine theliability to GST of the financial planning fees paid forthose services.

The services will be exempt from GST under section 14(exempt supplies) if:

• the activities undertaken involve the supply of“financial services” in terms of section 3; or

• the services are not in themselves “financialservices”, but are supplied together with asupply of “financial services”, and those otherservices are reasonably incidental andnecessary to that supply of financial services,and are not otherwise specifically excluded frombeing exempt supplies.

Activities that involve the provision of advice aregenerally excluded from the meaning of “financialservices”.

BackgroundAn investor who seeks advice from a financial adviserwill be charged for the services provided. Whetherthese fees are exempt supplies or subject to GST willdepend on the nature of the services provided.

When an initial financial plan has been devised,agreed to by the investor and implemented by theadviser, that is not necessarily the end of the matter.Usually systems are in place that require the adviser’scontinued involvement. Most financial advisers offera continuing monitoring service that is generally part

This statement sets out the Commissioner’s viewon the GST treatment of services provided inrelation to financial planning fees charged byfinancial advisers to plan, implement, and monitoran investment portfolio for their investor clients.This interpretation statement replaces Public RulingBR Pub 95/11 that appeared in Tax InformationBulletin Vol 7, No 7 (January 1996). The PublicRuling ceased to apply from 31 March 1999.

There are seven categories of financial planningfees, which are based on the process of obtainingan initial financial plan, the subsequent monitoringof that plan, and any following adjustments oralterations to the plan. The question of the GSTtreatment hinges on the actual nature of theservices provided rather than the label applied tothose services.

The following table summarises the GST treatmentof services provided in relation to the variouscategories of financial planning fees that arecharged by financial advisers. The table is ageneral guide only and should be read inconjunction with the more detailed explanations ofeach particular category contained in thisinterpretation statement.

Fee Category Services Subject to GST

Initial planning fees Yes

Implementation fees No

Administration fees No

Monitoring fees Yes

Evaluation fees Yes

Re-planning fees Yes

Switching fees No

INTERPRETATION STATEMENTSThis section of the Tax Information Bulletin contains interpretation statements issued by the Commissionerof Inland Revenue.

These statements set out the Commissioner’s view on how the law applies to a particular set ofcircumstances when it is either not possible or not appropriate to issue a binding public ruling.

In most cases Inland Revenue will assess taxpayers in line with the following interpretation statements.However, our statutory duty is to make correct assessments, so we may not necessarily assess taxpayerson the basis of earlier advice if at the time of the assessment we consider that the earlier advice is notconsistent with the law.


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of an overall advisory package. The investments aresometimes (but not always) placed in the care of acustodian (commonly for security reasons) who mayhave also been involved in the acquisition of theinvestments. The income derived from theinvestments may pass to the adviser or custodianwhere it is placed in a trust account before being ableto be drawn upon by the investor. The maintenance ofthese trust accounts by the adviser usually incurscosts that are charged to the investor. As part of theservice, the adviser may monitor the portfolio toensure that the aims of the investor are continuallymet. For this service the investor will often pay furtherfees. From time to time as part of this monitoringservice the adviser can recommend changes to theinvestment mix. If the investor accepts theserecommendations to change investments, further feesare incurred which may include switching fees.

It is the Commissioner’s view that public ruling BR Pub95/11 has been useful in respect of the GST treatmentof the financial planning fees. However, despite theissue of the ruling there has been occasionaluncertainty on how the ruling should be applied.Although some of these were discussed within thecommentary definitions of the three categoriesidentified, participants in the financial planningindustry may have had difficulty in applying theruling. It seemed logical to extend and further definethe present three categories to make it easier foradvisers and others in the financial planning industryto decide whether or not the planning fees weresubject to GST. Similar issues arose and the sameapproach was taken in relation to the previous incometax public rulings (Public Rulings BR Pub 95/10 and10A) that dealt with the income tax deductibility offinancial planning fees charged to investors.

Financial advisers charge for a number of servicesprovided to their clients, sometimes using differentnames for these component services. The GST taxtreatment of the fees depends not on the name givento the service, but on the nature of the service. Todetermine the correct tax treatment of a service, it isimportant to identify the exact service a financialadviser provides.

The adoption of the expanded categorisation of fees inthis statement is intended to make it easier for financialadvisers and others to determine how fees chargedand the services provided will be treated for GSTpurposes. The categories correspond to the processusually followed when an investor seeks theassistance of a financial adviser.

Fee categoriesThe fees charged by financial advisers vary from oneadviser to another, but generally they can be separatedinto a number of categories. Financial planners givethe fees charged various names, but the crucial pointthat determines the GST treatment is for whatservice(s) the fee is actually paid. The nature of theservice provided will determine whether the fees paidare for a supply of a “financial service” and thus anexempt supply, or otherwise qualify as a supply ofservices exempt from GST.

The fees can be summarised as:

(a) Initial planning fees: Fees charged in relationto services provided by the adviser for theinitial interview where the investor and theadviser discuss the investor’s investmentgoals, savings objectives, cash requirements,and life and general insurance requirements.The adviser then prepares a draft portfolio planfor the investor. Further interviews,discussions, and adjustments to the draft planmay follow until it is acceptable to the investor.

(b) Implementation fees: All fees for servicesassociated with implementing the draft plandevised in (a). They will include any one-offup-front fees paid to or made in respect ofservices or charges to advisers, administrators,executors, fund managers, etc., to purchase oracquire the investments. They includepayments to custodians on implementation ofthe plan or charges by fund managers for entryinto the investments.

(c) Administration fees: This fee category isgenerally described by advisers as “annualon-going” fees. They are charged by theadviser to cover the costs of maintainingrecords of the investor’s transactions with theadviser. This category also includes chargesrelating to the handling of cash for the investor,such as the withdrawal and deposit in theinvestor’s account with an administrator, bankcharges, and other administration fees. Alsoincluded are any fees or commissions chargedby the adviser for collecting income from theinvestments and arranging for this to be paid toor credited to the investor’s account with theadviser or to the investor’s own bank account.

(d) Monitoring fees: Annual charges formonitoring and reporting to the investor on theperformance of the portfolio (including theperformance of the fund managers and theadviser) in terms of the investor’s goals, andrelaying this information to the investor. Theadviser will prepare these reports from time totime.


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(e) Evaluation fees: Any fees for services relatingto an evaluation of an existing portfolio.Typically, these arise where an investor has anexisting portfolio of investments and eitherseeks a financial adviser’s advice for the firsttime, or seeks confirmation that the portfolio’sperformance is matching the goals originally setby either the investor, or with the assistance ofa financial adviser at the initial planning stage.This is a more detailed examination ofperformance of the portfolio than simplymonitoring performance and reporting to theclient. It may or may not result in arecommendation from the adviser to makechanges to investments within the portfolio tomaintain the investor’s aims.

(f) Re-planning fees: Fees for services relating tothe re-planning of a portfolio sometimes arisingfrom category (e) services due to changes tothe investor’s objectives. This could entailminor changes, or the complete restructuring ofinvestments and a change in investmentstrategy. Re-planning fees do not necessarilyrefer to advice supplied by the same adviser.They could be for advice by an adviser to anew client who had previously managed his orher own portfolio or had previously engaged adifferent adviser. Included in this category areany other fees as described in Initial planningfees at (a), when there has been a completerestructuring of investments.

(g) Switching fees: Fees related to the costsinvolved in selling existing investments and/orpurchasing new investments arising from arecommendation by the adviser as a result ofcategory (e) or category (f) services. The feeswill be charged by the adviser for changinginvestments within the portfolio. Also includedare any fees relating to the withdrawal in wholeor in part from an existing portfolio.

If financial planners charge a global fee (that includesfees for more than one of the above categories), it willbe necessary for that fee to be apportioned betweenthe categories, based on the particular servicesprovided for the fee, to ensure the fees are correctlytreated for GST purposes.

A similar apportionment exercise needs to beundertaken in the case of “performance fees”, wherean investor may have the option of being able to electto pay a performance fee instead of fees for some or allof the categories noted above. Performance fees are aform of global fee paid to advisers, based on how wellthe portfolio of investments selected by the adviserand agreed to by the investor is performing againstsome pre-determined measure.

The calculation of the seven categories of fees notedabove might be based on a standard fee structure,hours of work put in by the adviser, the amount of theinvestments made by the investor, or a combination ofthose. Performance fees on the other hand, arecalculated under some pre-determined formula basedon how well the investor’s portfolio, as recommendedby the adviser, performs over a period of time. Thesefees could include a standard amount, plus apercentage based on the extent to which the level ofgrowth or return from the portfolio exceeds previouslyagreed targets, or the fee could be based solely on apercentage of the returns/agreed targets.

Irrespective of the name given to the fee, or the basisof calculation, the GST treatment of the fees will bedetermined having regard to the services performed inestablishing, administering, and altering the investor’sportfolio, based on the seven categories of servicesmentioned above. It may be that in certain cases theperformance fee is paid in respect of all sevencategories of services, while in other instances the feemay be only for services coming within some of thecategories, e.g. the administration and monitoring feecategories. In view of this, in determining the GSTtreatment it is not the description (label) the adviserattaches to the fee charged that is relevant, rather it iswhat service (s) the fee is actually paid for.Performance fees are in reality no different to any otherglobal or multi-service fee charged by an adviser. Howthe amount is apportioned among the categories ofservices is a question of fact to be determined in thecircumstances of the particular case.

IssuesThe question considered in this statement is: in whatcircumstances will the Commissioner treat the servicesprovided in respect of financial planning fees as anexempt supply of services under section 14 of theGoods and Services Tax Act 1985? This will bedetermined by:

• The nature of the service provided for the feescharged, and whether these fees are in respectof a “financial service” in terms of section 3.

• In the event that the fees are not in respect of afinancial service, whether the services arereasonably incidental and necessary to thatsupply of financial services. This is subject tothe services supplied for those other fees nototherwise being specifically excluded frombeing exempt supplies.


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LegislationThe legislation relevant to this statement is containedin sections 3 and 14. Section 14 provides a GSTexemption for certain supplies, including the supply offinancial services, and section 3 defines the term“financial services” for the purposes of the Act.

Paragraph (a) of section 14(1) is relevant for thepurposes of this statement and provides:

The following supplies of goods and services shall be exemptfrom tax:

(a) The supply of any financial services (together with thesupply of any other goods and services, supplied by thesupplier of those financial services, which are reason-ably incidental and necessary to that supply offinancial services), not being¾

(i) A supply of financial services which, but for thisparagraph, would be charged with tax at the rate ofzero percent pursuant to section 11A of this Act;or

(ii) A supply of goods and services which (althoughbeing part of a supply of goods and services which,but for this subparagraph, would be an exemptsupply under this paragraph) is not in itself, asbetween the supplier of that first-mentionedsupply and the recipient, a supply of financialservices in respect of which this paragraph applies:

The parts of the section 3 definition of “financialservices” that are relevant for the purposes of thisstatement are as follows:

(1) For the purposes of this Act, the term “financialservices” means any one or more of the following activities:

(a) The exchange of currency (whether effected by theexchange of bank notes or coin, by crediting ordebiting accounts, or otherwise):

….

(c) The issue, allotment, drawing, acceptance, endorse-ment, or transfer of ownership of a debt security:

(d) The issue, allotment, or transfer of ownership of anequity security or a participatory security:

….

(ka) The payment or collection of any amount of interest,principal, dividend, or other amount whatever inrespect of any debt security, equity security, participa-tory security, credit contract, contract of life insur-ance, superannuation scheme, or futures contract:

(l) Agreeing to do, or arranging, any of the activitiesspecified in paragraphs (a) to (ka) of this subsection,other than advising thereon.

Analysis

General requirements of the legislationaffecting financial servicesIn order to determine whether particular servicessupplied are exempt, it is necessary that the suppliesfall into the criteria stipulated in section 14. Section14(1)(a) requires that there must be either a supply of afinancial service or the supply of a good or a servicethat is “reasonably incidental and necessary” to thesupply of a financial service provided by the samesupplier.

This raises two interpretation matters:

• What are financial services; and

• What does “reasonably incidental andnecessary” mean?

What are financial services?

Section 3 defines “financial services”. In terms of theissues raised by this statement concerning thetreatment of financial planning fees, the relevantsubparagraphs of section 3(1) are:

(1) For the purposes of this Act, the term “financialservices” means any one or more of the following activities:

(a) The exchange of currency (whether effected by theexchange of bank notes or coin, by crediting ordebiting accounts, or otherwise):

….

(c) The issue, allotment, drawing, acceptance, endorse-ment, or transfer of ownership of a debt security:

(d) The issue, allotment, or transfer of ownership of anequity security or a participatory security:

….

(ka) The payment or collection of any amount of interest,principal, dividend, or other amount whatever inrespect of any debt security, equity security, participa-tory security, credit contract, contract of life insur-ance, superannuation scheme, or futures contract:

(l) Agreeing to do, or arranging, any of the activitiesspecified in paragraphs (a) to (ka) of this subsection,other than advising thereon. [Emphasis added]

The parts of section 3(1) under consideration raise twofurther interpretative matters: the meanings to beascribed to the words “arranging” and “advising” asused in paragraph (l). A number of the supplies ofservices under consideration involve financialadvisers providing various levels of advice orarranging for another organisation to implement aninvestor’s financial plan (place investments, etc.)and/or to collect income from the investments andarrange payment or crediting to the investor. Apreliminary issue is the position under section 3(1)(l)of persons or organisations who may act asintermediaries between the investor and the personactually undertaking the activities specified inparagraphs (a), (c), (d) or (ka) of section 3(1).


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Intermediaries and section 3(1)(l)

The agreeing to do or arranging any of the activitieslisted in section 3(1) in terms of paragraph (l),encompasses the activities of brokers or intermediarieswho arrange for the provision of financial services,such as mortgage, superannuation and life insurancebrokers. This finding was concluded in ProductRuling BR Prd 96/30 issued by Inland Revenue inrespect of section 3(1)(l) (Tax Information BulletinVol 8, No 8, November 1996).

The adviser often does not actually undertake theactivities in section 3(1)(a) to (ka), but is authorised toarrange the activities to be undertaken for and onbehalf of another (the investor). In this situation theadviser is acting as an intermediary. In other words,the financial adviser itself does not implement the planbut acts on behalf of its clients and gets someone elseto implement the plan. This factor does not take theintermediary’s actions outside the ambit ofsection 3(1)(l).

Similarly, where a custodian is involved, it is thecustodian who usually implements the financial planon instruction from the financial adviser. Even thoughthere is another intermediary besides the financialadviser, the fees incurred for the activities undertakenby the custodian are still within the ambit ofsection 3(1)(l).

Meaning of “arranging” used in section 3(1)(l)

The term “arranging” is not defined in the Act.However, in ordinary use “arranging” is capable ofbeing given a wide or a narrow interpretation.

A wide interpretation would include every step thatcould result in a financial service being provided to theclient, independently of whether a service is actuallyprovided or of any intention of a service beingprovided. This would include promotions andmarketing which do not necessarily lead to any servicebeing provided or research into any areas to whichinvestment may be expanded in the future.

By comparison, a narrow meaning requires a nexus or aclose linkage to the provision of the actual financialservice to the client. These activities would includebrokerage activities or filling out forms for a client.The activities are for a specific purpose, and it ishighly probable that the supply of a financial servicewill occur following those activities. For example, thegeneral monitoring of the debt securities market wouldnot be arranging the issue of a debt security, despitethe monitoring being required for the making of aprudent investment.

Although the courts have not specifically discussedthe term “advising” in the context of section 3(1)(l),there are cases that indicate that a narrowinterpretation such as outlined above should beapplied. Davison CJ in Databank Systems Limited vCIR (1987) 9 NZTC 6,213 (HC) indicated that anappropriate meaning would be “cause to occur”. Thissuggests that there is also an element of certainty thatthe financial service will be provided to the client.Equally, Lord Templeman in CIR v Databank SystemsLimited (1990) 12 NZTC 7,227 (PC) indicated that theexemption did not extend to activities which merelyresulted in the supply of financial services thusrejecting the wide interpretation of “arranging”. Thesetwo judgments indicate the need for a closeconnection between the activity undertaken and thefinancial service supplied to the ultimate recipient (theinvestor) in order for that activity to be the arrangingof the financial service.

Databank (PC) also illustrates the principle that it isthe actual arranging activity being undertaken that isparamount and not the overall nature of the activitycomprising the services being supplied to the ultimaterecipient. Both the Databank (PC) and TurakinaMaori Girls College Board of Trustees v CIR (1993)15 NZTC 1,032 (CA) decisions demonstrate theimportance of dissecting the transaction involved todetermine precisely what activity is being undertakenin order to establish whether a financial service isbeing provided.

In summary, while the New Zealand courts have notdirectly considered what constitutes arranging interms of section 3(1)(l), they have provided somedeterminative guidelines in establishing theapplication of arranging. That is, “arranging” is to beinterpreted in a narrow sense, and that whenconsidering what is inclusive of arranging, it isimportant to dissect the transaction involved todetermine precisely what activity is being undertaken,and not be swayed by the overall nature of the activitythat the recipient or supplier may be involved with.This is in order to establish whether it is a financialservice that is being provided (Databank (PC),Turakina Maori Girls College and Case Q10 (1993)15 NZTC 5,061).

Putting this into the context of section 3(1)(l),“arranging” must have a direct connection to thespecific supply of the financial service. It is notenough that the arranging may have caused thesupply of that financial service, what is necessaryis that the activity of arranging intentionally causesthe provision of a financial service as defined insection 3(1)(a) to (ka).


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This interpretation is consistent with how the courts inthe United Kingdom have defined the term “making ofarrangements” (Hargreaves Landsdown AssetManagement v C & E Commrs [1995] BVC 896,Dogbreeders Associates v C of CE (1989) VATTR 317and Donald Ford v The Commissioners (1987)VATTR 130) and how Revenue Canada has defined theterm “arranging” in its policy statement(Ruling No. 11783-2).

In order to establish whether there is an activity ofarranging pursuant to section 3(1)(l), it is thereforenecessary to establish the following criteria:

• The service to which the arranging relates is afinancial service as defined by section 3(1)(a) to(ka) (Databank (PC)); and

• The activity is a precursor to the provision of afinancial service which the intended recipient ofthat financial service has already decided to useor to obtain. “Arranging activities” that arisebefore a decision is made to proceed by theintended recipient, are considered too farremoved and the provision of the financialservice too uncertain. Therefore, provision ofthe financial service being arranged must not besubject to another person’s overriding decisionon whether to proceed. The “arranging”activity is tainted by the financial service’scharacter as it is closely connected and has thepurpose of organising the provision of thatfinancial service or causing it to occur(Dogbreeders Associates, Databank (HC)); and

• The activity undertaken is to intentionallycause the provision of the financial service.This does not mean that no arranging has takenplace if the financial service is cancelled or doesnot proceed. As long as the requisite activity isundertaken with the specific intention ofcausing the provision of a financial service to arecipient, then it will meet the test of“arranging” (Databank (HC), DogbreedersAssociates and Donald Ford).

Meaning of “advising thereon” used in section3(1)(l)

Section 3(1)(l) expressly excludes the activity of“advising thereon” from the concept of arranging afinancial service, and therefore the “financial services”definition. If a service is advisory, then it is not anexempt supply under section 14(1)(a).

The courts in New Zealand (and overseas) have notconsidered the words “advising thereon”. However,the word “advice” has been considered. In JR MoodieCo Ltd v Minister of National Revenue [1950] 2 DLR145 Rand J (at p.148) stated:

The word “advice” in ordinary parlance means primarily theexpression of counsel or opinion, favourable or unfavourable,as to action, but it may chiefly in commercial usage signifyinformation or intelligence.

The Concise Oxford Dictionary suggests two types ofadvising (being consistent with the Moodie decision).Advising that involves a degree of counsel orrecommendation, and advising that merely involvesnotification; the dissemination of information.

In one sense, the exclusion for “advising thereon”from the paragraph (l) activity of “agreeing to do, orarranging” other financial services activities, could besaid not to apply to the mere provision of informationto a client in order for that client to decide where thefunds should be invested.

However, it is possible to argue that the reference to“advising thereon” is in fact capable of wider meaningand also excludes (from financial services) theprovision of information.

To assist in settling this point it is necessary toconsider the meaning of the word “thereon”.Comparing the meaning of “thereon” with the word“thereof” may also assist in determining the meaningto be applied to the phrase “advising thereon”.

The Concise Oxford Dictionary (8th ed.), for example,includes the following definitions:

thereof adv. formal of that or it.

thereon adv. archaic on that or it (of motion or position).

on … 14. concerning or about …

In the context in which the phrase “advising thereon”is used in section 3(1)(l), it is considered that it bearsthe more limited of the two possible meanings. That is,the exclusion for “advising thereon” requires morethan mere notification of or the dissemination ofinformation regarding the activities in section 3(1)(a) to(ka). Rather it excludes activities involving a degree ofinterpretation of information, counsel or opinionrelating to those activities.

However, in the case of the information and reportingservices provided by financial advisers or planners,many such services may well incorporate a range ofthe varying levels of advice. Given that, carefulconsideration will be necessary by advisers andplanners to determine whether their particular servicesare, or are not, subject to the exclusion for “advising”on the activities specified in section 3(1)(a) to (ka).

Even if an activity is not “advising”, it does not meanthat it will automatically be a financial service or asupply of services exempt from GST. The requirementthat the activity be itself a financial service or thearranging of a financial service, or “reasonablyincidental and necessary” to a supply of an associatedfinancial service (discussed below) must still be met.


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Meaning of “reasonably incidental andnecessary” in section 14(1)(a)

As referred to earlier in this statement, the supply ofservices that are “reasonably incidental andnecessary” to the supply of any financial service andsupplied by the same supplier, are also exemptsupplies under section 14(1)(a).

The Act does not define the term “reasonablyincidental and necessary” and there are no cases onthe meaning of this particular phrase. Therefore, it isnecessary to consider the ordinary usage of thecomponent parts of this phrase. The Act doeshowever import an element of reasonableness to both“incidental” and “necessary”, by the inclusion of theword “reasonably” in the phrase “reasonablyincidental and necessary” itself. Most of the cases arefact-specific in their interpretations and indicate thatwhat is “necessary” or “incidental” is largely aquestion to be decided on the particular facts of eachcase. The following summarises those interpretations.

It can be reasoned that the phrase “reasonablyincidental and necessary” is designed to measure twoseparate although related things:

• Firstly, the level of association or connectionbetween the type of financial services suppliedand the type of other goods and servicessupplied which are under consideration, viz“incidental” (or “reasonably incidental”); and

• Secondly, how essential or “necessary” theother goods or services are for that supply offinancial services to occur.

Were that not the case there would have been no needto include both elements in the phrase, as simplyincluding the narrower of the two conjunctive testswould have been all that was needed. Parliamentcould not have enacted a provision that leads toabsurdity or an incongruous result, requiring a lesserdegree of connection (“reasonably incidental”) but atthe same time be essential (“necessary”) for thesupply of the financial service to occur. It is thereforeconsidered that “reasonably” applies to both“incidental” and “necessary”.

“Reasonably incidental”

A number of cases have suggested that incidentalmeans ancillary or consequential or provided insubordinate conjunction with something else. Fromthese cases, the word “incidental” suggests that theservice must be an associated service that issecondary to and that depends on a financial serviceas the main or primary service. It must be aconsequence of a financial service or provided inconjunction with one of the financial services insection 3(1).

The meaning of the words “reasonably incidental” issomething more than that which has a mere casual,accidental, or fortuitous connection with the otheritem. It also means something more than an item thatmay only possibly or sometimes be associated withthe other item. From the cases, the words suggest aservice that it is reasonable to expect will be suppliedor offered with the financial service.

In the context of section 14(1)(a) a service that is“reasonably incidental” to the supply of a financialservice is an associated service:

• That is ancillary to (C and E Commissioners vCH Beazer (Holdings) plc (1989) 4 BVC 121and C and E Commissioners v WellingtonPrivate Hospital Ltd (CA) [1997] BVC 251), oroccurs or is provided in subordinateconjunction with (Department of Health andSocial Security v Envoy Farmers [1976] 1 WLR1,018, Canadian National Railway v Harris[1946] 2 DLR 545, CH Beazer (Holdings), andWellington Private Hospital), the financialservice (i.e. is a service that is secondary to anddependent on the financial service as theprimary service, and provided in combination orconjunction with that financial service); (seealso Mindell v Canadian Northern ShieldInsurance (1990) 43 CCLI 191, Re Fahy’s WillTrusts [1962] 1 All ER 73, AG v PontypriddUrban District Council [1906] 2 Ch 257); and

• That it is reasonable to expect the supplier toprovide in the course of undertaking the supplyof the financial service (CIR v DatabankSystems Ltd (1990) 12 NZTC 7,227 (PC)).

Something is not “reasonably incidental” if it is merelydesirable or profitable (Hazell v Hammersmith andFulham London Borough Council [1991] 1 All ER545), or convenient or advantageously provided withthe financial service rather than by necessaryimplication being incidental or accessory to it(AG v Manchester Corporation [1906] 1 Ch 643).

[Reasonably] “necessary”

The word “necessary” narrows the meaning of thephrase “reasonably incidental and necessary”. Theword “necessary” can be interpreted as having a wideor a narrow meaning. The Concise Oxford Dictionarydefinition imparts an ingredient of being essential tothe activity being performed. However, there is anissue in terms of how essential the performance is inrelation to the fulfilment of a specific activity.

The case law is fact specific on this point and it is theactual context in which the term “necessary” appearsthat indicates in broad terms the degree of essentialitythat the term “necessary” is designed to effect.


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For example, in Re an Inquiry under the CompanySecurities (Insider Dealing) Act 1985 [1988] 1 All ER203 at 208, Lord Griffiths stated that “necessary” has ameaning that lies somewhere between “indispensable”on the one hand, and “useful” or “expedient” on theother, and suggested “really needed” as the meaning.

In Europa Oil (NZ) Ltd (No2) v CIR (1974) 1 NZTC61,169 the New Zealand Court of Appeal consideredthe meaning of the word “necessarily” in the contextof deductions required to be “necessarily incurred”under the income tax general deductions provision.McCarthy P in the leading judgment, disagreed withthe High Court of Australia’s interpretation of“necessarily” in Ronpibon Tin NL & TongkahCompound NL v FCT (1949) 78 CLR 47 and held thatthere was no justification for watering-down the usualmeaning of the word. The Court of Appeal commentedfurther on the meaning of “necessarily” in itssubsequent decision, Europa Oil (NZ) Ltd (No.2) vCIR (1974) 1 NZTC 61,238, stating that the word didnot merely mean “clearly appropriate or adapted for”as was suggested in Ronpibon Tin.

The Court of Appeal has therefore rejected a widermeaning for the word.

The degree of necessity required for a non-financialservice to be “reasonably incidental and necessary” toa financial service, on the basis of the context that“necessary” arises in section 14(1)(a), and also basedon the comments of McCarthy P in Europa Oil (No.2),can be taken to mean that the provision of the servicemust be seen from the surrounding circumstances tobe needed or required for the provision of a financialservice stipulated in section 3(1).

The meaning to be applied to the word “necessary”(qualified by “reasonably”) and the phrase“reasonably incidental and necessary” must also beconsidered in the context in which the words appear inthe Act. That is, as an extension to an exemption,when the prima facie position under the Act is that allsupplies are taxable unless made expressly exempt.This also indicates that the words should not beinterpreted too widely.

Summary – “reasonably incidental and necessary”

In summary, for an additional non-financial service tobe “reasonably incidental and necessary” to theprovision of a financial service, it must be anassociated service that:

• Is of a type that it is reasonable to expect thesupplier to provide in the course of undertakingthe supply of the financial service, and that issecondary to and dependent on the financialservice as the primary service, and suppliedtogether with or as a consequence of thatfinancial service; and

• Can be seen from the surroundingcircumstances to be needed or required for thesupply of the financial service to the recipient.

Apportionment of global feesBefore discussing how the above legislative principlesrelating to the GST treatment of financial servicesapply, it is necessary to determine how global fees areto be apportioned.

Where a global or combined fee is charged for severalsupplies of services, some of which are exemptsupplies and some of which are standard-ratedservices, section 10(18) requires an apportionment ofthe fee between the taxable and exempt supplies:CIR v Smiths City Group Limited (1992) 14 NZTC 9,140.Under section 10(18), if a taxable supply is not the onlysupply to which a consideration relates, the supplyshall be deemed to be for such part of theconsideration as is properly attributable to it.

This interpretation statement has categorised thecomponent parts of financial planning fees based onthe process of obtaining an initial financial plan,subsequent monitoring of the plan, and any followingadjustments or alterations to that plan. It isconsidered that if fees are charged by financialadvisers on the basis of the description of thesecategories, then determining what amount is subject toGST will be on a more objective basis than theprevious public ruling. In the event that a financialplanner charges a global fee (e.g. performance fees) forsome or all of the different supplies of servicesprovided, an apportionment of that global fee, basedon the categories discussed in this statement, will berequired. The amount allocated to each category willbe a question of fact in each case.

As noted earlier, the label given to such a supply isnot necessarily determinative of the nature of thesupply. It is a question of fact what services areprovided for the fee, and it is the actual servicesprovided that will determine the GST treatment.

Appropriate apportionment methods

The object of any apportionment is to identify the partof the consideration that is “properly attributable” tothe taxable supply in question. The answer can onlydepend on the circumstances of the particular caseand must be fair and reasonable and not be arbitrary orbased on mere speculation: Ronpibon Tin NL v FC of T;Tongkah NL v FC of T (1949) 78 CLR 47; 8 ATD 431;Buckley & Young Ltd v CIR (1978) 3 NZTC 61,271.

The onus will be on the adviser to show that a definedpart of the consideration is properly attributable tosomething other than a taxable supply, althoughabsolute precision or scientific calculation of anamount is not required as long as there is someintelligible basis supporting the conclusion: Buckley& Young.


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Depending on the facts of the case, an appropriatemethod of apportioning the global fee may be to applya “time apportionment method” using the adviser’stime spent carrying out the activity of each category ofservice provided. In apportioning such a global feeany clearly identifiable direct expenses (those thatclearly relate to a specific category) not specifiedseparately from the global fee, would usually first bededucted and put to that category. The remainingglobal fee would then be apportioned on the basis ofthe time spent carrying out the activity of eachcategory of service provided (the time apportionmentmethod).

GST treatment of the particularservices in the new categoriesHaving discussed the legislative principles relating tothe GST treatment of financial services generally, thoseprinciples will now be applied in relation to the sevenseparate financial planning fees categories.

Initial planning fees

These fees relate to services provided by the adviserfrom the initial interview stage up to the finalisation ofthe portfolio plan for the investor. Events leading upto this point may include the preparation of a draftplan, subsequent discussions with the investor, andadjustments to the draft until it is acceptable to theinvestor.

Initial planning services do not come within any ofparagraphs (a) to (ka) of the definition of “financialservices” in section 3(1) and in particular paragraphs(a), (c), (d) or (ka), which are the only ones in thisgroup relevant to this statement. The only possibilityis paragraph (l).

In relation to paragraph (l), it is unlikely that initialplanning services in this category would fall within thenarrow interpretation of “arranging” as set out earlierin this statement. In many cases where an investorseeks initial planning services, it is not until theadviser completes the portfolio plan and it is approvedand adopted by the investor that a final decision toinvest is likely to be made. Activities undertakenbefore a decision to invest or a positive intention ofentering into the transaction would appear too farremoved and the provision of the financial service istoo uncertain (not that it is essential for actualprovision of a financial service to be the outcome).

Initial planning services in the circumstances outlinedwould not be an arranging service that is tainted bythe character of any other financial service theadvisers may provide, as it is not closely connected tonor has the purpose of organising the provision ofthat financial service. To that extent, therefore,such initial planning activities would not comewithin the initial section 3(1)(l) requirement thatthey involve “agreeing to do or arranging” any of the

paragraph (a) to (ka) activities. If that happens suchactivities have failed the first test, and the fact thatthey may also be excluded from being financialservices by virtue of the subsequent “advising”criterion in paragraph (l) is of little relevance.

Situations may exist where planning services meet thefirst requirement of agreeing to do or arranging.However, even if meeting the “arranging” requirementin paragraph (l), initial planning services will fallsquarely within the ordinary meaning of “advising”and thus the general exclusion for advising activitiesin paragraph (l). In this connection, the preparation ofthe portfolio plan will certainly involve to a significantdegree the provision of advice and suggestions orrecommendations by the adviser.

Initial planning services provided by advisers are notreasonably incidental and necessary to any supply offinancial services on the basis outlined earlier in thisstatement. Services that are reasonably incidental andnecessary to the supply of any financial service (i.e. asupply coming within section 3(1)(a) to (l)) are alsoexempt supplies under section 14(1)(a). As outlined inthe next section, where an adviser arrangesimplementation of an investment plan, once adoptedby the investor those implementation services aregenerally financial services.

However, the initial planning services are not anadditional subordinate service arising out of, orprovided in conjunction with and ancillary to, anyimplementation of that advice (i.e. a supply of financialservices). The existence of the initial planningservices is not dependent on the supply of thoseimplementation services. Initial planning services aretherefore not reasonably incidental and necessary tothe supply by the adviser of any financial services.

Initial planning services’ fees are subject to GST.They do not constitute financial services under any ofparagraphs (a) to (ka) of section 3(1), nor do theseactivities as undertaken by advisers generallyconstitute the “agreeing to do or arranging” of any ofthe paragraph (a) to (ka) activities in terms ofparagraph (l). The initial planning services do involveadvisers in “advising” the investor on an investmentprogramme, and therefore come within the specificexclusion from the definition of a financial service insection 3(1)(l).

Implementation fees

This category relates to all fees for services associatedwith implementing the initial investment plan devisedin the preceding section. They will include any one-off, up-front fees paid to or made in respect of servicesor charges to advisers, administrators, executors, fundmanagers, etc., to purchase or acquire the investments.


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The fees include payments to custodians onimplementation of the plan or charges by fundmanagers for entry into the investments.

These services are provided in relation to theplacement of investments. The role played by theadviser in relation to the services may vary. In somecases the adviser may directly undertake the purchaseor acquisition of investments whether they be debtsecurities, equity securities, or participatory securities.However, usually the adviser will engage anotherorganisation (e.g. a broker) to implement theinvestment plan on the adviser’s instructions andplace investments on behalf of the investor. Thisother organisation is often referred to as the“custodian”.

As previously noted, the use of one or moreintermediaries does not prevent the services providedby them from being financial services in terms ofsection 3(1)(l).

To the extent that the adviser may directly undertakethe purchase or acquisition of investments in the formof a debt security, equity security or participatorysecurity, those implementation services constitutefinancial services in terms of section 3(1)(c), (d), and/orpossibly paragraph (l). As such they are, therefore,exempt supplies. The activity of transferringownership of such securities is itself a financial serviceunder paragraphs (c) or (d).

On the other hand, the implementation of theinvestor’s investment plan by the adviser organisingthe placement of the investments constitutes thearranging of that transfer of ownership activities interms of paragraph (l). Such organising the placementof investments comes within the meaning of“arranging” as outlined earlier in this statement.

In situations where a custodian implements the planand acquires the particular investments on theinstruction of the financial adviser, the fees charged bythe adviser to the investor are also for an exemptsupply of arranging financial services in terms ofsection 3(1)(l). The arranging service is tainted by thefinancial service’s character, as it is closely connectedto and has the purpose of organising the provision ofthat financial service or causing it to occur.

If the adviser uses a custodian (or other person ororganisation) to place investments and passes on anyof that person’s charges for this service to the investoras a disbursement, no GST consequences will arise forthe adviser if the adviser is acting as the investor’sagent.

Section 60(2) deems a taxable supply of goods andservices made to an agent on behalf of a principal tobe a supply made to the principal. Under this section, asupply of services that the adviser receives as agentfor a client investor is deemed to be supplied to the

investor client, not to the adviser. If the adviser paysfor the supply and the client investor reimburses theadviser for that payment, the reimbursement is notconsideration for a supply of services by the adviser.The adviser does not have to account for GST outputor input tax on the supply.

The discussion on the GST consequences ofdisbursements was outlined in the item“Disbursements by professional firms on behalf ofclients – GST” on page 5 of Tax Information BulletinVol 6, No 1 (July 1994).

Where the adviser incurs custodian’s charges in thecapacity of principal, and on-charges the investor aspart of an “implementation fee”, no GST output tax ispayable by the adviser so long as the servicessupplied by the adviser in respect of thatimplementation fee are themselves still financialservices. In this respect it is not the name given to thefee that determines the GST treatment but the actualnature of the services provided.

NB. Whether the adviser is acting in the capacity ofprincipal (or agent of the investor) will be establishedbased on the facts. That is, the nature of the contractor arrangements between the parties.

Implementation services will be financial servicesunder section 3(1)(c), (d), and/or (l), and as such theyare exempt supplies under section 14(1)(a).

Administration fees

These fees are generally described by advisers as“annual on-going” fees. They are charged by theadviser in respect of services provided in, and to covercosts of, maintaining records of the investor’stransactions with the adviser. They are also in respectof services and charges relating to the handling ofcash for the investor, such as the withdrawal anddeposit in the investor’s account with an administrator,bank charges, and other administration fees. Any feesor commissions charged by the adviser for collectingincome from the investments and arranging these to bepaid to or credited to the investor’s account with theadviser or to the investor’s bank account are alsoincluded.

The different activities or services described as fallingwithin the administration fees category are addressedindividually.

Income collection and distribution

Fees or commissions charged by the adviser forcollecting income from the investments andarranging these to be paid to or credited to theinvestor’s account with the adviser or to theinvestor’s bank account, may generally be acceptedas falling within the wording of section 3(1)(ka).That is, “the payment or collection of any amountof interest, principal, dividend, or other amount”.


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This is on the basis that the amounts concerned relateto investments in a debt security, equity security,participatory security, credit contract, contract of lifeinsurance, superannuation scheme, or futurescontract.

Alternatively, if part of the activities performed by theadviser in collecting investment income and arrangingpayment or crediting to the investor’s account (asdescribed in this fees category) do not fall entirelywithin section 3(1)(ka), then they usually constitutefinancial services within paragraph (l). That is, theactivities would fall within “arranging” one of theactivities specified in the earlier paragraphs of section3(1). This is on the basis that the particular serviceinvolved actively carrying out a service prior to theactual payment of an amount in respect of theinvestment. There is a direct nexus between theadviser doing this and the actual payment of anamount in respect of the investments, which is afinancial service within paragraph (ka) of section 3(1).

If a person other than the adviser (e.g. custodian orinvestment administrator) performs the incomecollection and distribution activities underconsideration in this part of the statement, thoseactivities would generally be financial services in termsof either section 3(1)(ka) and/or (l).

Cash handling services and charges

Services and charges relating to the handling of cashfor the investor, such as the withdrawal and deposit inthe investor’s account with an administrator, bankcharges, etc., are also considered initially undersection 3(1)(ka) and/or (l). This is on the basis that the“investor’s cash” referred to relates to money eitherarising from investment income, investment sales orwithdrawals, or provided by the investor to makeinitial, additional or new investments. Furthermore, thesame person or organisation undertakes both the cashhandling services and the associated incomecollection and distribution services or investmentplacement services (or the arranging of such services),whether it is the adviser or administrator, etc.

Subject to the money concerned relating toinvestments of the type specified in paragraph (ka),the activities referred to can be considered to comewithin the wording in the paragraph:

… payment or collection of any amount of interest,principal, dividend, or other amount whatever in respectof …

To the extent that it could be argued that part of thecash handling activities referred to may not directlyinvolve “payment or collection of … or other amountwhatever”, it is considered they could come withinsection 3(1)(l) as being involved with the arranging ofsuch activities. A direct nexus exists between theadviser or administrator doing this and the actualpayment of an amount in respect of the investments.

On the other hand, it could be argued that the cashhandling activities are not always a precursor to thepayment or collection of the investor’s interest,principal, dividend or other amount or “cause thatcollection or payment to occur” and are therefore not“arranging”.

However, even if the cash handling activities referredto do not constitute arranging, they would still qualifyas an exempt supply under section 14(1)(a). That is onthe grounds that they are “reasonably incidental andnecessary” to the Income collection and distributionservices element of the administration fees alreadystated to be a financial service.

Without the cash handling services and investoraccounts, the adviser or administrator would be unableto undertake the financial service of collecting andprocessing distributions for investors; thosedistributions being placed in each investor’s “cashholding account”. Maintaining such investors’accounts is essential to the adviser or administratorbeing able to supply the service of income collectionand distribution for investors. Consequently, cashhandling activities are regarded as being reasonablyincidental and necessary to the Income collection anddistribution services element of the administrationservices that are a financial service supplied by thesame person.

On that basis, to the extent there is doubt as to theseservices qualifying as financial services under section3(1)(ka) and/or (l), they would still qualify as an exemptsupply in terms of section 14(1)(a). That is, they arereasonably incidental and necessary to the Incomecollection and distribution services element of theadministration fees already stated to be a financialservice.

Maintaining records of the investor’s transactionswith the adviser

To the extent that these activities relate to records ofcash transactions between the adviser and investor,the reasoning and conclusions outlined in theprevious section will apply equally here. This is onthe basis that both the records maintenance activityand the associated income collection and distributionservices and/or investment placement services (or thearranging of such activities), to which the cashtransactions relate, are undertaken by the same personor company, whether it is adviser or administrator, etc.Where this occurs, this part of the administration feeactivities will constitute an exempt supply. That will beeither by virtue of being a financial service undersection 3(1)(ka) and/or (l) or a supply of a service thatunder section 14(1)(a) is reasonably incidental andnecessary to those other supplies making up theadministration fee services as described (which inthemselves are financial supplies supplied by the sameperson or company).


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The position may be somewhat different where themaintaining of transaction records’ activity referred tois undertaken by someone other than the person orcompany maintaining and operating the investor’sinvestment cash account (or carrying out incomecollection and distribution or investment placementservices). In that situation, the maintaining oftransaction records could not be a supply of servicesthat are reasonably incidental and necessary toanother supply of services that are financial servicesas required by section 14(1)(a).

If the transaction records relate to the placing ofinvestments and/or implementation of an investmentplan (the undertaking or arranging of which it isconsidered is a financial service under section 3(1)(c),(d) and/or (l)), then (subject to the above comments)the keeping of such records is reasonably incidentaland necessary to those other services. The keeping ofsuch records would be essential as opposed to merelybeing a desirable adjunct to such activities.

Summary

Based on the activities making up the administrationfee category being as described, the services providedin relation to administration fees constitute exemptsupplies either:

• by virtue of being financial services comingwithin one of the paragraphs in section 3(1); or

• by being reasonably incidental and necessaryto the supply of those financial services interms of section 14(1)(a).

Monitoring fees

Monitoring fees are the annual charges for servicesprovided in monitoring and reporting to the investoron the performance of the portfolio (including theperformance of the fund managers and the adviser) interms of the investor’s goals. The adviser will fromtime to time prepare reports on the portfolio’sperformance and relay this information to the investor.

Earlier in this statement, it was concluded that thecontext in which the word “advising” is used in thephrase “advising thereon” in section 3(1)(l) indicatesthe more limited of two possible meanings. That is, theexclusion for advising thereon requires more than merenotification of or the dissemination of informationregarding the financial service activities in section3(1)(a) to (ka). Rather it excludes activities involving adegree of interpretation of information, counsel oropinion relating to those activities.

Based on the description of monitoring servicesoutlined, such services will not usually be subject tothe “advising thereon” exclusion from financialservices within the terms of section 3(1)(l). However,as indicated earlier, some information and reporting

services provided by financial advisers or plannersmay well incorporate levels of advice that fall insidethe meaning attributed to the exclusion for advising onthe activities specified in section 3(1)(a) to (ka).Careful consideration will, therefore, be necessary todetermine whether particular services are, or are not,subject to the exclusion.

As discussed, even if an activity is not “advising” itdoes not mean that it will automatically be a supply ofservices that is exempt from GST. The requirement thatthe activity itself be a financial service or the arrangingof a financial service, or reasonably incidental andnecessary to a supply of an associated financialservice still has to be met.

Based on the earlier criteria in this statement forsatisfying the “agreeing to do, or arranging”requirements in section 3(1)(l), the monitoring servicesdo not meet those tests. Neither are monitoringservices reasonably incidental and necessary toanother supply of services which is itself a financialservice.

On this basis, monitoring fees will be regarded as notconstituting a financial service in terms of section 3(1)or an exempt supply in terms of section 14(1)(a) andare therefore subject to GST.

Evaluation fees

This category includes fees relating to servicesinvolving subsequent evaluations of the portfolio’sperformance, where the investor generally seeksconfirmation that an already established portfolio ismatching the goals set by either the investor or at theinitial planning stage. This is a more detailedexamination of performance of the portfolio thansimply monitoring performance and reporting to theclient. It may or may not result in a recommendationfrom the adviser to make changes to investmentswithin the portfolio to maintain the aims established inthe initial planning stage.

Evaluation fees arise where the investor already has anexisting portfolio and seeks advice to make changes tothe income producing structure but not to the aims orgoals of that structure.

The services covered by these fees can be comparedwith and are similar in nature to some of thoseprovided under the Initial planning fee categorydiscussed earlier, in particular the provision of advicerelating to future investment options and preparationof an investment plan. As such the GST treatment ofevaluation fees is reasonably clear and is in line withthat applying to Initial planning fee services. That is,the services do not come within any of paragraphs (a)to (ka) of the definition of “financial services” insection 3(1) and in particular paragraphs (a), (c), (d) or(ka), which are the only ones in this group relevant tothis statement. The only possibility is paragraph (l).


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However, to the extent that these evaluation feeservices do happen to involve agreeing to do, orarranging any of the activities specified in section3(1)(a) to (ka), the services would fall squarely withinthe “advising” exclusion in section 3(1)(l). Evaluationfees are therefore subject to GST.

Re-planning fees

The category includes fees relating to servicesinvolving a re-planning of a portfolio sometimesarising from Evaluation fees services due to changesto the investor’s objectives. This could be a minorchange or a complete restructuring of investments anda change in investment strategy. Re-planning fees donot necessarily refer to advice supplied by the sameadviser. The fees could be for advice by an adviser toa new client who had previously managed his or herown portfolio or had previously engaged a differentadviser. The category could include any other fees forservices as described in Initial planning fees above,when a complete restructuring of investments hasoccurred.

As the name suggests, a re-planning could involve therestructuring of the current portfolio to meet theinvestor’s existing or changed investment goals andusually includes recommendations or suggestions forfuture investment.

The services covered by these fees are very similar tothose in the Evaluation fees category above, exceptthat re-planning fees arise when there is a change inthe investor’s investment objectives. The distinctionis that Evaluation fees relate to looking at performanceagainst original objectives whereas re-planning feesinvolve looking at new objectives and what changesare needed to achieve that. The services covered byre-planning fees do not include those relating to actualimplementation of changes, which will come within theSwitching fees category below. The GST treatment forservices in the re-planning fee category is thereforethe same as for Evaluation fees and the analysis is inline with that applying to Initial planning fee services.

That is, the services do not come within any ofparagraphs (a) to (ka) of the definition of “financialservices” in section 3(1) and in particular paragraphs(a), (c), (d) or (ka), which are the only ones in thisgroup relevant to this statement. The only possibilityis paragraph (l). However, to the extent that theseservices do happen to involve agreeing to do, orarranging any of the activities specified in section3(1)(a) to (ka), the services would fall squarely withinthe “advising” exclusion in section 3(1)(l).Re-planning fees are therefore subject to GST.

Switching fees

These fees relate to the costs involved in sellingexisting investments and/or purchasing newinvestments arising from a recommendation by theadviser as a result of services suppled in relation tothe two preceding fee categories (Evaluation fees andRe-planning fees). The fees will be charged by theadviser for services provided in changing investmentswithin the portfolio, and will include any fees forservices relating to the withdrawal in whole or in partfrom the then existing portfolio.

The services provided for these fees have closesimilarities to those in the Implementation feescategory, and in fact will include many that are thesame. In particular up-front fees paid to or made inrespect of services or charges to advisers,administrators, executors, fund managers, etc., topurchase or acquire the new investments will arise inboth the implementation fees and switching feescategories. The same can be said for payments tocustodians (on implementation of any amended plan),or charges by fund managers for entry into newinvestments.

Section 3(1) will apply to services in the switching feescategory, in the same way as it applied to thoseservices in the implementation fees category. Theanalysis relating to the application of the law to theseservices is the same.

The activity of transferring ownership of debt, equity,or participatory securities is a financial service undersection 3(1)(c) or (d). To the extent that the adviserdirectly undertakes the sale or purchase of suchsecurities as part of a switching of investmentsexercise, those switching services constitute financialservices in terms of section 3(1)(c), (d) and/orparagraph (l). As such they are, therefore, exemptsupplies.

If a custodian implements an amended plan andswitches or changes the particular investments on theinstruction of the financial adviser, the fees charged bythe adviser to the investor are also for an exemptsupply of arranging financial services in terms ofsection 3(1)(l). This is in line with the conclusionsdrawn earlier as to the meaning of “arranging”.


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ExamplesThese examples are included to assist in explaining theapplication of the law.

Example 1

Financial Adviser prepares an initial portfolio plan, andcharges Investor $2,000 for it. Investor decides toaccept the plan, and asks Financial Adviser to arrangewith Custodian for its implementation. FinancialAdviser asks, on Investor’s behalf and as Investor’sagent, for Custodian to implement the plan.Custodian’s fee is charged to Investor by an invoicesent to Financial Adviser. Financial Adviser passesthe invoice on to Investor. Custodian’s fee is $1,500,additional to the $2,000 charged by Financial Adviser.

The $2,000 Financial Adviser charges Investor is for ataxable supply of initial planning services. The advicefalls either outside the agreeing to do or arrangingrequirement, or within the “advising” exclusion, inparagraph (l) of the section 3(1) definition of “financialservices”. Financial Adviser must account for GSToutput tax on the supply.

Passing on Custodian’s invoice to Investor has noGST implications for Financial Adviser, becauseFinancial Adviser is simply the agent of Investor.Custodian’s services are exempt supplies ofimplementation services and no GST output tax needsto be returned by Custodian.

Example 2

Six months after implementing the plan, FinancialAdviser passes on to Investor dividend incomecollected on Investor’s behalf. Financial Adviser alsoconducts an evaluation of the investment portfolio’sperformance. Financial Adviser charges a smallcommission of $50 for collecting the dividend incomeand $250 for the evaluation service.

The $50 charge for collecting dividends isconsideration for an exempt supply under section3(1)(ka). Financial Adviser does not need to returnGST on the amount. The $250 for the portfolio reviewis an evaluation service and as such is within the“advising” exclusion in section 3(1)(l) and thereforesubject to GST. Financial Adviser must return GSToutput tax on this amount.

Example 3

Financial Adviser has prepared a portfolio plan(involving debt, equity, and participatory securitieswithin the meaning of section 3) that Investor asksFinancial Adviser as agent to arrange with Custodianto implement. Financial Adviser maintains a record oftransactions between Investor, Financial Adviser andCustodian relating to investment purchases andplacement, sales/withdrawals and collection, anddistribution of investment income to Investor.

Financial Adviser undertakes collection anddistribution of investment income and operates a cashaccount for Investor through which movement offunds is recorded.

Financial Adviser charges an annual on-going fee of$500 for the record administration and maintaining theaccount for Investor, plus an income collection anddistribution commission of 5% of the investmentincome collected.

The 5% commission for collecting investment incomeis an exempt supply, being in respect of a financialservice under section 3(1)(ka).

The annual on-going fee of $500 for services inadministering Investor’s records and cash account isnot in respect of a financial service under any of theparagraphs of section 3(1). However, those serviceswould be regarded as being reasonably incidental andnecessary to the financial service of payment orcollection of interest, dividends, principal (section3(1)) and/or to an extent, the arranging of theinvestment placement portfolio implementationfinancial service (section 3(1)(l)), and thus would be anexempt supply under section 14(1)(a).

Financial Adviser does not need to return GST oneither of these fee amounts.

Comments on technical submissionsreceivedSome comments received in the course of producingthis item suggested that the phrase “reasonablyincidental and necessary” appearing in section 14(1)(a)should be interpreted as meaning highly expedientand that other narrower meanings for the phrase givenin the draft item, such as an integral part of, wereinconsistent with that wider meaning. Thesecomments led us to review the cases used to determinethe meaning of the phrase “reasonably incidental andnecessary”. That review concluded that the previousrange of meanings given for the phrase was too wide.The cases, in particular Databank, Re an Inquiry, andEuropa Oil (No.2), together with the context in whichthe provision incorporating the phrase appears in theAct, show that the meaning of the phrase “reasonablyincidental and necessary” is not as wide as the wordshighly expedient suggest. The cases and legislativecontext also indicate that the meaning of the phrase isnot as narrow as the words an integral part ofsuggests. The Commissioner’s view of the meaning ofthe phrase is as set out earlier in the interpretationstatement, and is considered to describe more clearlynow what the cases have interpreted as the goods andservices that come within the phrase “reasonablyincidental and necessary”.


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LEGISLATION AND DETERMINATIONSThis section of the TIB covers items such as recent tax legislation, accrual and depreciation determinations,livestock values and changes in FBT and GST interest rates.

DETERMINATION: AMOUNT OF A SPECIFIEDWITHHOLDING PAYMENT (BEING HONORARIA PAID TOSCHOOL TRUSTEES) THAT SHALL BE REGARDED ASEXPENDITURE INCURRED IN PRODUCTION OFPAYMENT

IntroductionThis Determination sets out the amount regarded asexpenditure incurred in the production of specifiedwithholding payments when those payments arehonoraria paid to school trustees.

Section NC 2 of the Income Tax Act 1994 requiresanyone who makes a source deduction payment todeduct tax when making it.

Under section OB 2 (1) of the Income Tax Act 1994 awithholding payment is included in the definition of“source deduction payments”. Consequently, anyperson who makes a withholding payment mustdeduct tax from it at the time it is made, unless anexemption applies.

Honoraria paid to school trustees come within thedefinition of “withholding payment” in the Income Tax(Withholding Payment) Regulations 1979. Theregulations require withholding tax of 33% to bededucted from honoraria.

Regulation 7 of the Income Tax (WithholdingPayments) Regulations 1979 allows the Commissionerto determine an amount or proportion of any specifiedwithholding payment that is considered to beexpenditure incurred in the production of thatpayment. If the Commissioner has made such adetermination, the person paying the specifiedwithholding payment is only required to deduct taxfrom the amount that exceeds this threshold.

ApplicationThis Determination applies to payments made toschool trustees (honoraria) for each board meetingattended, up to a maximum of 11 meetings a year. Itapplies:

– to honoraria paid on or after 1 April 2001, and

– until the Commissioner varies or revokes thisdetermination.

InterpretationIn this Determination, unless the context otherwiserequires, expressions have the same meaning as in theIncome Tax (Withholding Payment) Regulations 1979and sections NC 2 and OB 2(1) of the Income Tax Act1994.

DeterminationWhen any trustee receives honoraria for attendance ata board meeting, the sum of $55 per member, or $75 forthe chair, shall be regarded as expenditure incurred inthe production of the payment. The maximum annualamount of the specified withholding payment shall notexceed $605 per member, or $825 for the chair.

However, if the trustee receives any reimbursement (inaddition to honoraria) for expenditure incurred toattend that meeting, the amount exempted under thisdetermination ($55 or $75 for the chair) shall bereduced by the amount of that additionalreimbursement.

This Determination is made by me, acting underdelegated authority from the Commissioner of InlandRevenue under section 7 of the Tax AdministrationAct 1994.

This Determination is signed on the 13 July 2001.

Raju Budhia

(Acting) National Manager Technical Standards


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Examples

Example 1The chair receives honoraria of $75 a meeting. Nopayment is made in respect of any expenditureincurred, for example, travel. The payer does not haveto deduct withholding tax because the total paymentdoes not exceed $75.

Example 2The chair receives a total payment of $95, made up ofan honorarium of $70 and reimbursement of travelexpenses of $25. The payer must deduct withholdingtax from $20 (honorarium of $70 reduced by thedifference between the exemption allowed under thedetermination ($75) and the additional reimbursement($25)).


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LEGAL DECISIONS – CASE NOTESThis section of the TIB sets out brief notes of recent tax decisions made by the Taxation ReviewAuthority, the High Court, the Court of Appeal and the Privy Council.

We’ve given full references to each case, including the citation details where it has already been reported.Details of the relevant Act and section will help you to quickly identify the legislation at issue. Short casesummaries and keywords deliver the bare essentials for busy readers. The notes also outline the principalfacts and grounds for the decision. Where possible, we have indicated if an appeal will be forthcoming.

These case reviews do not set out Inland Revenue policy, nor do they represent our attitude to thedecision. These are purely brief factual reviews of decisions for the general interest of our readers.

WHETHER WAIVER OF TIME BAR FOR ASSESSMENTEFFECTIVE

Case: CIR v Vela Fishing Limited

Decision date: 3 July 2001

Acts: Tax Administration Act 1994, IncomeTax Act 1976

SummaryThe CIR was successful in his appeal from the HighCourt decision of Penlington J reported at [2001] 1NZLR 437; (2000) 19 NZTC 15,885.

FactsThe taxpayer was subject to an audit. In February1998 the 31 March time bar was approaching for the1991 year. The taxpayer signed a waiver under section108B of the Tax Administration Act 1994 (“TAA”),extending time to 30 September 1998. Inland Revenuereassessed on 30 September. The taxpayer thencontended that the waiver was ineffective, because itapplied only to time bars established under the TAAand not to time bars which existed under earlierlegislation (the Income Tax Act 1976). Therefore, thetaxpayer said that the assessment was out of time.

DecisionThe Court held that section 227(4) TAA required thereference to the 1994 time bar provision (section 108TAA) in section 108B (the provision authorisingwaivers) also to be read as a reference to the 1976 timebar provision (section 25 Income Tax Act 1976).

Therefore, the waiver extended the period for the CIRto assess in this case. The Court said:

“The question, then, is whether there is correspondence inthat broad sense in relation to the times, circumstances orpurposes as regards the continuing operation of s25. Wehave no hesitation in holding it to be a correspondingprovision to the new s108. It has the same character andfunction. It pre-supposes the amendment of assessmentswithin the time limit. During the four years the amendmentfunction will be exercised as the statute provides. That isintended in each case and s25 and the new s108 are intendedto produce that result. The altering of assessments duringthe 4 year period is something which is “to be done under orfor the purposes of, that corresponding provision”.


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APPLICATION FOR JUDICIAL REVIEW; APPLICATION FORLEAVE TO PROCEED

DecisionHis Honour, Chambers J, dealt with the standing ofFloorlines first. He held that, as the company hadbeen struck off, it would need to apply forreinstatement but, in any event, that was not to delayMr Duncan’s proceeding against the Commissioner.Only if it were reinstated could a separate applicationfor review be entertained. In the meantime its presentapplication was to be struck out.

On the Rule 478 matter, his Honour held that there wasno evidence to exculpate the applicants. There had infact been inordinate delay and it was inexcusable. HisHonour noted, however, that as the review couldproceed on affidavit evidence only, there was noprejudice to the Commissioner and the matter shouldproceed.

Under Rule 477, the Commissioner submitted that thereview application was without merit, and the claim sountenable it could not succeed. His Honour noted:

“I do not know whether Mr Duncan will be able to substanti-ate the allegations he has made. If they are true, however,then at least some of them may be the stuff of judicial review.It may be that Mr Duncan could have taken these pointswhen he followed the statutory objection route ... It iscommon ground, however, that he did not then take thesepoints.”

However, the fact that Mr Duncan (and Floorlines) hadwithdrawn their objections rather than having a courtdecide the issues, meant that the Commissioner couldnot rely on issue/cause of action estoppel or theextended doctrine of res judicata. His Honour heldthat the Commissioner had not established that judicialreview was hopeless on the established facts.

His Honour struck out the Floorlines claim and madeorders that:

• Mr Duncan was to file a separate statement ofclaim on his own behalf, containing no newallegations.

• The new statement was to be simplified and theprayers for “ancillary orders” were to bedeleted.

• The Commissioner may oppose any “freshprejudice” the amended statement of claim mayraise.

• Mr Duncan must seek the Commissioner’sapproval to file two affidavits in support. If thatis not given (the Commissioner has only vieweddrafts at this time), leave of the Court must beobtained.

Case: Floorlines (NZ) Ltd and W ADuncan v CIR

Decision date: 19 June 2001

Act: Judicature Amendment Act 1972

Keywords: Judicial review, delay, striking-out,leave to proceed

SummaryChambers J struck out Floorlines (NZ) Ltd’s judicialreview application but granted Mr Duncan leave toproceed.

FactsThe Commissioner assessed Mr Duncan, and one ofhis companies, Floorlines (NZ) Limited (“Floorlines”),for tax on undisclosed income in the years 1967–1978.The investigation was prolonged and revealed manyanomalies in the way company profits were accountedfor. As it became apparent that substantial amountshad been diverted to various staff “welfare” funds,and then to Mr Duncan, the Commissioner issuedsection 400 notices to recover tax from him and hiscompanies. The assessments were amended a numberof times as the ongoing investigation revealed furtherfacts. Mr Duncan objected to the assessments andpenalties and the matter went before Thorpe J in thelate 1970s. After cross-examination of Mr Duncan,Thorpe J indicated that he had not made out his caseand that he should reconsider his position. MrDuncan then withdrew his objection and the matterwent no further.

In 1990 Mr Duncan instructed new counsel whoinitiated the present judicial review proceedings on thebasis that the assessments were “irrational” and“arbitrary”. Various judicial conferences followed atwhich the judges directed Mr Duncan to apply to haveFloorlines reinstated to the register of companies.Floorlines had been struck off in 1990 upon theCommissioner’s application and has not since beenreinstated.

Counsel for the applicants moved in mid-2000 for leaveof the court to continue the proceeding under Rule426A of the High Court Rules. The Commissionercounter-applied to have the matters struck out underHigh Court Rules 477 (no reasonable cause of action)and 478 (inordinate delay/prejudice).


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As to costs, his Honour said:

“While the Commissioner was unsuccessful in having MrDuncan’s proceeding dismissed, I do not think it would beappropriate for the Commissioner to have to pay costs to MrDuncan. Mr Duncan has been guilty of inordinate andinexcusable delay. He is permitted to continue his proceedingbut that is an indulgence.”


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REGULAR FEATURES

August 2001

6 Employer deductions and Employer monthly schedule

Large employers ($100,000 or more PAYE and SSCWT deductions per annum)

• Employer deductions (IR 345) or (IR 346) form and payment due

• Employer monthly schedule (IR 348) due

20 Employer deductions



Employer deductions and Employer monthly schedule

Small employers (less than $100,000 PAYE and SSCWT deductions per annum)



31 GST return and payment due

September 2001

5 Employer deductions and Employer monthly schedule




20 Employer deductions



Employer deductions and Employer monthly schedule

Small employers (less than $100,000 PAYE and SSCWT deductions per annum)



28 GST return and payment due

DUE DATES REMINDER

These dates are taken from Inland Revenue’s Smart business tax due date calendar 2001–2002

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PU2956: Payments made by parents or guardians of students to state schools – 31 August 2001GST treatment.

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YOUR CHANCE TO COMMENT ON DRAFT TAXATIONITEMS BEFORE THEY ARE FINALISEDThis page shows the draft public binding rulings, interpretation statements, standard practice statements, andother items that we now have available for your review. You can get a copy and give us your comments in theseways:

The Manager (Field Liaison)Adjudication & RulingsNational OfficeInland Revenue DepartmentPO Box 2198WELLINGTON

By post: Tick the drafts you want below, fill in your name andaddress, and return this page to the address below. We’ll sendyou the drafts by return post. Please send any comments inwriting, to the address below. We don’t have facilities to dealwith your comments by phone or at our other offices.

By internet: Visit www.ird.govt.nz/arweb/index.shtmlClick on “Have your say on draft items” to get to “Thinkabout the issues”. Below that heading, click on the drafts thatinterest you. You can return your comments by the internet.

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