Any Returns you get from your Smartshares Units will be a combination of:
(a) any change in the price of Smartshares Units at the time you sell, relative to the price at which you bought on market, or subscribed if an application was made directly; and
(b) the distribution of dividends or other income received by the Smartshares Fund. Smartshares Funds distribute all income received (for example, dividends and tax credits) less liabilities (for example, tax expenses and management fees). Please note that these examples of income and liabilities are not exhaustive and other types of income may be received and liabilities incurred from time to time. You will automatically have your distributions re-invested as Smartshares Units unless you elect to have them paid directly to a nominated bank account.
29
Key factors that determine returns for Smartshares Funds
The Returns for the Smartshares Funds are subject to the general fluctuations and direction of the New Zealand sharemarket (in the case of the NZ Dividend Fund) or the Australian sharemarket (in the case of the Aus Financials Fund and Aus Resources Fund), up or down, and the performance of the Index Issuers, which includes changes in their security prices and the value of any dividends or other distributions paid. Both of these factors are influenced by New Zealand, Australian and global economies.
In addition, currency fluctuations between the New Zealand and Australian dollar will impact on the Returns for the Aus Financials Fund and the Aus Resources Fund as the Manager does not currently take steps to hedge against currency fluctuations.
Amount of the returns
The amount of the Returns you get from your investment in Smartshares Units will vary from time to time, depending on the factors above. Returns cannot be predicted with any accuracy. None of the Manager, the Trustee, NZX, the Custodians and Administration Manager nor any other person guarantees a particular level of Return on your investment in Smartshares Units. No Returns are promised.
Distributions
Distributions are currently made directly from each Smartshares Fund within 20 Business Days of the Record Date and are paid to Unitholders whose names are on the register in respect of Units held on the Record Date. The Record Date for the NZ Dividend Fund and the Aus Financials Fund is on or around the last Business Day of each of March, June, September and December in any year and the Record Date for the Aus Resources Fund is on or around the last Business Day of each of March and September.
Unitholders who sell Units or withdraw Baskets from a Smartshares Fund before a Distribution Ex Date for a Record Date will not receive any distributions from that Smartshares Fund in respect of that Record Date. These distributions comprise dividends or any other income (including income from securities lending, where relevant, which will be 50% of net revenue received by the Manager from securities lending), less fees and other expenses. Income paid into a Smartshares Fund in foreign currency will not be available for distribution to Unitholders until it has been exchanged for New Zealand dollars. Unitholders will automatically have their distributions reinvested as Smartshares Units unless they elect to have them paid directly to a nominated New Zealand bank account.
The Manager may, at its discretion, deduct from any distribution an amount of cash if, and to the extent that, the Manager reasonably considers that such a deduction is required to meet any liabilities that become payable in the next (or later) distribution period. Such deductions will be retained in the Fund.
The Manager receives and retains any interest earned on income held prior to distribution. The directors of the Manager expect to continue with this distribution policy.
Taxation
The following comments are intended to be only a general summary and indication of the relevant New Zealand and Australian tax law as at the date of this Investment Statement. There may be non-New Zealand tax consequences which affect the Smartshares Funds or the Unitholders. Neither the Trustee nor the Manager accepts any responsibility for the taxation consequences of an investment in the Smartshares Funds. Unitholders who buy or sell Smartshares Units may have different taxation positions. Consequently, each Unitholder should consider their own taxation position and if necessary seek professional advice before investing in Smartshares Units.
Taxation may affect the Returns on the Smartshares Funds and each of the Smartshares Funds may have varying tax implications. The taxation summary below is based on New Zealand and Australian tax law as at the date of this Investment Statement.
The Smartshares Funds are Listed PIEs. As Listed PIEs the Smartshares Funds pay tax on income derived by the Smartshares Funds at a rate of 28%.
30
New Zealand Taxation of investments of the Fund
The Smartshares Funds are not subject to tax on gains that they derive from the sale of shares in most New Zealand resident companies and most companies resident in Australia that are listed under the ASX Market Rules. Losses incurred on the disposal of such shares are not deductible. Dividends from such shares are usually fully taxable to the Smartshares Funds, with a credit allowed for any Imputation Credits attached (but not for any Australian Franking Credits), and any withholding tax deducted from such dividends subject to certain limits.
Depending on the equities which constitute the index that each Smartshares Fund tracks, any of the Smartshares Funds may be subject to tax in respect of offshore portfolio equity investments. These rules only apply to non-New Zealand and certain Australian quoted securities (including any NZX listed securities consisting of shares in non-New Zealand resident entities). In relation to the applicable equities, the Smartshares Funds will apply the “fair dividend rate” (“FDR”) method to calculate the amount of any taxable income. Under the FDR method, the Smartshares Funds will generally have taxable income in each income year (1 April to 31 March) in relation to the applicable equities calculated by reference to 5% of the average daily opening market value of the applicable equities. Dividends or sales proceeds received by the Smartshares Funds in relation to these shares should not be subject to further tax. The Smartshares Funds may be entitled to a credit for any withholding tax paid on dividends received from the applicable equities subject to certain limits. No tax deduction may be claimed for any losses in respect of the applicable equities under the FDR method.
New Zealand Taxation Liability of New Zealand resident investors - distributions
The following summarises the New Zealand taxation of distributions made by the Smartshares Funds to Unitholders who are resident in New Zealand for New Zealand income tax purposes.
To the extent that Imputation Credits are available, the Smartshares Funds will fully impute distributions to Unitholders by attaching Imputation Credits to the distribution at the maximum permitted ratio.
To the extent that distributions are not fully imputed New Zealand resident Unitholders will not be taxed on distributions that they receive from the Smartshares Funds. The effect of this is that non-taxable income (e.g. capital gains from the sale of investments) derived by the Smartshares Funds can be distributed to such Unitholders free from tax.
Natural person Unitholders and trustee Unitholders (other than a trustee of a unit trust) subject to a tax rate below the corporate tax rate (currently 28%) may choose to treat distributions that are fully imputed as assessable income by including that amount in their tax return. This allows such Unitholders to use Imputation Credits attached to distributions in excess of what is necessary to fully satisfy the income tax liability in relation to those distributions, to offset against their other taxable income. How Unitholders should treat distributions from the Smartshares Funds for tax purposes will depend on their personal tax circumstances and as such it is recommended that all Unitholders should seek independent tax advice. New Zealand Taxation Liability of non-resident investors - distributions
The following summarises the New Zealand taxation of distributions made by the Smartshares Funds to Unitholders who are not resident in New Zealand for New Zealand income tax purpose.
To the extent that Imputation Credits are available, distributions to Unitholders will be fully imputed.
Non-resident withholding tax (“NRWT”) will be withheld at the rate of 15% from distributions which are fully imputed. The NRWT rate on fully imputed distributions can be reduced:
to 0% if the Unitholder holds 10% or more of the Smartshares Units in a Smartshares Fund; or to a rate below 15% if the Unitholder is resident in a jurisdiction with which New Zealand has a
double tax agreement that permits a lower tax rate.
New Zealand also has a foreign investor tax credit regime whereby the impact of NRWT on dividends is reduced by the payment of a supplementary dividend for investors holding less than 10% of the Smartshares Units in a Smartshares Fund and if the NRWT rate is 15% or more. The Smartshares Funds intend to pay supplementary dividends to non-resident Unitholders wherever possible, provided that payment meets the
31
Trust Deeds' requirements and does not disadvantage other Unitholders.
To the extent distributions are not fully imputed, non-resident Unitholders will not be taxed on such distributions and no NRWT will be withheld by the Smartshares Funds.
Benefits of PIE
A benefit of the PIE regime is that Smartshares Funds are not expected to be taxed on any gains derived from the sale of the securities that they trade.
The other potential benefit is that tax payable on distributions made by a Smartshares Fund to Unitholders is effectively capped at 28%. If you are currently paying tax at a rate less than 28% then the excess tax paid by the Smartshares Funds can be used to reduce the tax payable on other income that you derive at the end of each income year by including the distributions from the Fund(s) in your tax return.
PIE Eligibility
The Manager has the discretion to take any steps the Manager considers necessary or desirable to ensure that each Smartshares Fund is eligible to be enrolled and remain as a PIE. This includes ensuring that any one Unitholder’s unit holding does not exceed the maximum investor interest size requirement in the Tax Act, which is a number of Smartshares Units not exceeding 20% of the total issued Smartshares Units of each Smartshares Fund (for these purposes, the Smartshares Units held by the relevant Unitholder’s “associated persons” that are not Exempt Investors and who, themselves, hold Smartshares Units amounting to 5% or more of the units on issue will also be taken into account in determining whether the 20% threshold has been exceeded).
There is no investor interest size requirement for a Unitholder that is an Exempt Investor. Any such exempted Unitholder may hold up to 100% of the Smartshares Units in the Fund.
The Manager also has the ability to request any relevant information from Unitholders to endeavour to ensure compliance with the PIE rules and the Trust Deeds. Additionally, the Manager has the ability to rectify any breach of the PIE holding restrictions in accordance with the PIE rules and the Trust Deeds. For further information regarding the eligibility of a Smartshares Fund to operate as a PIE within the PIE requirements please refer to the Smartshares Funds' prospectus or contact the Manager.
Basket Investments
The tax status of some Unitholders may be such that they are liable for tax on profits derived from the disposal of Index Securities. In the case of the Smartshares Funds, contributing securities in exchange for Smartshares Units will constitute a realisation of the securities for tax purposes for those Unitholders. New Zealand Taxation Treatment on Disposal of Units in the Smartshares Funds
The New Zealand tax treatment of profits realised or losses incurred on the disposal of Smartshares Units will depend upon the tax position of the Unitholder. Generally speaking, profits from the disposal of Smartshares Units will be subject to tax or a deduction will be allowed for losses incurred if:
the Unitholder acquired the Smartshares Units for the purpose of sale or other disposal; or
the Unitholder carries on a business involving dealing in the Smartshares Units or other similar property; or
the disposal of the Smartshares Units occurs as an act done in the carrying on of a profit-making scheme or undertaking.
As a general comment, most PIEs that invest in a Smartshares Fund should not be subject to tax on any gains made on the disposal of Units in the Fund, and other Unitholders which are resident in a country with which New Zealand has a double tax agreement may qualify for tax relief so that they are also not subject to tax on any gains made on the disposal of Units in the Fund.
32
As the Smartshares Funds do not have a permanent establishment in Australia and will not hold at any time 10% or more of the issued shares in any Index Issuer, the Smartshares Funds should not be subject to Australian income tax in respect of any gains made on disposal.
Where fully Franked dividends are paid by Australian resident companies to the Smartshares Funds, no Australian tax should be withheld at source in Australia.
Where unfranked or partially Franked dividends are paid by Australian resident companies to the Smartshares Funds, it is likely that Australian tax will be withheld at source in Australia in relation to the unfranked portion of the dividend. Where the Smartshares Funds hold less than a 10% interest in each company that they invest in, the rate of Australian withholding tax on unfranked dividends should be 15%. Any such unfranked dividends would be paid to the Smartshares Funds net of any withholding tax paid to the Australian tax authorities.
Please refer to the prospectus for the Smartshares Funds for information on stamp duty.
Reinvestment of distributions
Unitholders will automatically have their distributions reinvested in Smartshares Units unless they elect to have them paid directly to a nominated New Zealand bank account. If not already a member of the Distribution Reinvestment Plan, a Unitholder may elect to reinvest his or her distributions by returning the Distribution Reinvestment Plan form to:
The Unit Registrar
Link Market Services Limited PO Box 91976
Auckland 1142 Tel (09) 375 5998 Fax (09) 375 5990
Email: [email protected]
Notice of election for the Distribution Reinvestment Plan (forms are available from Smartshares Limited) received by the Unit Registrar at least ten Business Days prior to a Distribution Date will be effective in respect of that distribution, otherwise such notice will be effective in respect of the next distribution. Once you have elected to reinvest your distributions, reinvestment will continue until you advise the Unit Registrar otherwise. Fees for the Distribution Reinvestment Plan are set out on page 27.
Securities Lending
The Manager will administer a securities lending programme for the NZ Dividend Fund, under which securities held by the NZ Dividend Fund may be loaned to a borrower.
The Manager has the power under the Trust Deeds to also undertake securities lending for the Aus Financials Fund and Aus Resources Fund, and the possibility of a securities lending programme for those Smartshares Funds is (and is deemed to be) included in the issue terms for each Smartshares Fund.
Securities lending involves the transfer of legal title and beneficial interest in the securities to a third party borrower, in some cases, against collateral, and in other cases under other appropriate risk mitigation arrangements. There are additional risks associated with securities lending. These risks are set out on page 36. The NZ Dividend Fund (and any other Smartshares Fund that implements a securities lending programme) will receive income earned from securities lending following payment of the Manager’s costs of and fees for administering securities lending.
When securities are lent the NZ Dividend Fund (and any other Fund that implements a securities lending programme) will receive a cash payment for any dividends (including any Imputation Credits) paid in respect of any loaned securities to the holder on the Record Date for the payment of the dividend, so that the Smartshares Funds will receive the same Return from the securities that they would have received had they held them directly.
33
Additional source of income: Securities lending should earn income (for example, by receiving a share of interest received on cash collateral provided by borrowers) and, following payment of the Manager’s costs of and fees for administering securities lending, should increase Returns to Unitholders of Smartshares Funds that have or implement a securities lending programme.
Facilitates creation of Baskets: The creation and withdrawal of Baskets tends to assist the market price of the Smartshares Units of Smartshares Funds that have or implement a securities lending programme to more closely follow the value of the underlying securities. One of the constraints on Basket trading is the lack of liquidity of some Index Securities. The ability to borrow these securities may assist Market Participants to trade complete Baskets of underlying securities.
Terms of Securities Lending
The Trust Deeds permit the Manager to lend securities held by the Smartshares Funds only in accordance with certain terms, as set out in the appendix to the Smartshares Funds' prospectus.
The Manager will carry out any securities lending for the NZ Dividend Fund through the NZCDC Settlement System, which is a designated settlement system.
The NZCDC Settlement System is operated by subsidiaries of NZX. NZCL, a subsidiary of NZX, is the central counterparty clearing house for the NZCDC Settlement System, and will become the borrower in respect of all securities lent by the NZ Dividend Fund. It will also settle all securities loans in accordance with the rules of the NZCDC Settlement System. NZDL, another subsidiary of NZX, operates the depository for the NZCDC Settlement System, in which Index Securities of the NZ Dividend Fund are held, and administers securities lending. New Zealand Depository Nominee Limited, another subsidiary of NZX, holds the legal title to those Index Securities that are held in the depository.
Therefore the entities which operate the NZCDC Settlement System used by the Manager, being ultimately wholly owned by NZX, are related parties of the Manager under the Listing Rules. The Special Division has granted the Manager a waiver from the Listing Rules to allow the Manager to conduct securities lending through the NZCDC Settlement System.
The Manager does not currently lend securities held by the NZ Dividend Fund directly to NZX Market