In late 2022 the Commissioner issued a rotten Christmas present to taxpayers, asserting that when a taxpayer has FIF interests and is late filing a tax return the Commissioner gets to deny a calculation methodology specifically allowed by legislation. Bah humbug.  Submissions close 10 February 2023.

Full details below and at : Foreign investment fund (FIF) default calculation method (

Too much eggnog:  IRD confuse ‘when’ with ‘how’

Immediately prior to Christmas 2022, and perhaps immediately after a Christmas Party, the Commissioner of Inland Revenue[1] has issued an external consultation paper on a draft QWBA regarding the Foreign Investment Fund FIF default calculation method.

Directly rejecting the submissions of CPA Australia (and no doubt many others) on a previous draft, the updated QWBA proposes to force taxpayers that for some reason are late to lodge an income tax return and have FIF interests to use the fair dividend rate method, or alternatively, the cost method.

The issue with that, and it’s a pretty big issue to be fair, is that the legislation specifically allows taxpayers to choose between eligible methods, and enforcing a default method with no good reason can seriously disadvantage a taxpayer for being late to file.

How do IRD get there?

It’s a given that income tax returns should lodged by due dates.  However, there are a myriad of reasons why a return may be filed late or incorrectly.

If a return is not received, the taxpayer hasn’t chosen a method.

If the taxpayer hasn’t chosen a method, then default method rules do apply.

On this basis IRD then implicitly conclude that if an income tax return has not been received by the due date, the taxpayer has not chosen a method, and the purpose for which those default rules apply are for all assessments thereafter.

What’s wrong with this?

The Commissioner is forgetting that the purpose of the imposition of default calculation rules is to allow some form of FIF income to be included within a taxpayer’s income if default assessments are required – e.g. because IRD need to issue default assessments for a recalcitrant taxpayer. 

Conveniently, cabinet has included headings in legislation which, although are only a guide and not part of the legislation itself, remind users of that: “Section EX 48 Default Calculation Method”.  The section itself even goes on state that it applies where “a person does not choose a calculation method…”

If a taxpayer does not make a choice, the default rules apply.  Conversely, and this is critical, if they do eventually make a choice, the default rules do not and cannot apply.

So how does a taxpayer choose a calculation method?

Choosing a calculation method is very easy.  Section EX 44(2) states that “The person must choose which calculation method applies by completing their return of income accordingly…”

A completed return of income means a choice has been made, and in that case, section 48 and the default calculation methods are simply not applicable.

How do these two provisions interact?

The Commissioner is taking a position that a failure to lodge a return by the due date is a failure to choose a calculation method.  However, there is quite simply no legislative link or mechanism between the two.  If a return can still be lodged later than the due date and we know that is generally accepted to occur, then under the legislation a choice can be made in that return.

The Commissioner is, whether intentionally or inadvertently, attempting to expand the default provisions that exist in order to cover situations where default assessments are required, to also apply, inappropriately, to further subsequent situations where valid returns are lodged, albeit perhaps late, and a choice of calculation method is made therein.

Why is this a problem?

The Comparative Value method often results in a lower income for a taxpayer.  Removing the ability for eligible taxpayers to use that method could readily result in material income variances, including imposing tax even when the taxpayer has received no return and the investment value has dropped.

Once a taxpayer has used a method, they must continue to use that method in the next period unless they are allowed to change.

We have assisted many taxpayers who have for whatever reason been unaware of the need to determine taxable income arising from a foreign investment even though in their mind they hadn’t actually receive income.

One common situation is that they have received an inheritance of a foreign investment fund portfolio from overseas relatives and only considered New Zealand income tax implications on proposed repatriation sometime later.  Others have simply made an investment but haven’t taken the appropriate advice or have applied the complex FIF rules incorrectly. 

In such cases, we have previously calculated FIF income using appropriate eligible methods, made a prompt and even unsolicited voluntary disclosure to IRD, and completed income tax returns accordingly.  Under IRD’s proposals, those calculations would have to be undertaken using the default method(s) only, despite the legislation allowing the taxpayer the choice of method.

IRD’s role in encouraging errors

Regrettably errors are effectively encouraged by the Commissioner’s ongoing false rhetoric that tax is simple, tax agents and specialist advice is not required, and that taxpayers should simply register for MyIR and manage their own tax affairs.  The Commissioner issues default assessments early in the filing year and has the audacity to even apply a ‘lodgement’ date.  IRD even directly communicates with clients of tax agents and provides information that is redundant and sometimes incorrect. 

In our view it is reprehensible that the Commissioner now penalises taxpayers who have been tricked by IRD’s false advertising.

It also encourages such taxpayers to keep their head down and hope IRD doesn’t identify the shortfall.  By doing so, the Commissioner is effectively discouraging both compliance and compliance remediation by way of voluntary disclosures.

Actions from here

We will be working closely with other colleagues to lodge further submissions on this draft QWBA to IRD.

You can find the current draft QWBA here: Foreign investment fund (FIF) default calculation method (

Submissions close 10 February 2023.  Please forward your comments to

[1] The Commissioner can have only one view, and IRD staff are representing that view.

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