18 FEBRUARY

NEW ZEALAND GAZETTE

reset periodically according to a predetermined formula. The formula links the Interest rate to an indicator rate such as the bank bill or interbank rate.

Reviewable rate arrangements are those where the Interest rate is set periodically in line with market rates. Any change in the Interest rate reflects and is consistent with changes in market Interest rates. The most common form of reviewable rate loan is a mortgage where the Interest rate is subject to periodic review by the lender.

(2) The income or expense in relation to a variable rate arrangement could consist of:

(a) Periodic Interest payments as determined from time to time;

(b) A premium or discount on the issue or face value of the arrangement;

(c) Fees paid or received in relation to the arrangement. These amounts must be accrued.

(3) The methods provided in this determination separately accrue:

(a) Periodic Interest on a daily basis over the income year to which it relates;

(b) Any discount or premium and fees over the term of the arrangement, on either a straight line basis (Method A) or a yield to maturity basis (Method B).

(4) The critical factor in deciding whether Method A or Method B applies to an arrangement is the size of the premium or discount (including fees) relating to the arrangement.

(a) Method A applies to financial arrangements where there is a small (or no) discount or premium. These are arrangements where the discount or premium and fees (non-contingent fees with a limit of 2% of the core acquisition price, plus contingent fees) is less than 2% of the average amount of principal outstanding over the term of the arrangement. (For a full definition see clause 5 Interpretation).

(b) Method B is of general application, and may be applied to any variable rate financial arrangement within the scope of this determination.

(5) Method A permits the spreading of fees and premium or discount over the term of a financial arrangement on a straight line basis, in proportion to the principal outstanding. The simplest case of Method A occurs where the principal is fixed throughout the term. In that case, the premium or discount and fees are spread on a straight line basis over the term of the arrangement.

(6) Method B can be applied regardless of the amount of fees and premium or discount. It requires the fees and premium or discount to be spread on a yield to maturity basis. Since the future cashflows are not known, the actual yield to maturity rate cannot be calculated, but must be estimated. This is done by using the initial Interest rate (or price or index) and assuming that this rate will apply throughout the term of the financial arrangement.

The spreading of fees and premium or discount may be done on either a per Period basis or a per income year basis. To calculate the yield to maturity, Method B uses either Determination G3: Yield to Maturity Method or Determination G10B: Present Value Calculation Methods and G11A: Present Value Based Yield to Maturity Method.

(7) It is important to note that in both Method A and Method B there is no recalculation or respreading of fees and discount or premium, when there is a change in Interest rate, price, or index. The spreading is done only once, at either the date of acquisition or issue as the case may be.

(8) Interest is calculated separately for each period (or income year) depending on the actual Interest rate applying in the Period (or the Periods within that income year).

(9) A holder of a variable rate financial arrangement to which this determination applies may bring any fees or premium received at the date of issue of the financial arrangement into income at that time.

(10) Those taxpayers to whom section 64C (2A) of the Act applies should use Determination G24: Straight Line Method.

2. Reference

This determination is made pursuant to section 64E (1) (b) of the Income Tax Act 1976.

3. Scope

Determination G26 shall be applied to any variable rate financial arrangements where:

(a) All of the amounts payable (other than the principal, any discount or premium, and any fees) are either:

(i) set periodically according to a predetermined formula. That formula must link the amounts payable to economic, commodity, industrial, or financial indices or prices, or banking rates, or general commercial rates; or

(ii) set periodically by reference to market interest rates; and

(b) The amounts of principal (including any fees and any premium or discount) and the times or intervals at which they are to be advanced or repaid, are known, or are able to be determined, or can reasonably be anticipated, as at the first balance date after issue or acquisition.

(c) Interest is paid at least annually.

Determination G26 provides two alternative methods acceptable for the purposes of section 64C (3) of the Act.

(Note: A determination to which Determination G26 refers may be changed or rescinded by a new determination made by the Commissioner. In such a case, a reference to the old determination is taken to be extended to the new determination.)

4. Principle

(1) The income deemed to be derived or expenditure deemed to be incurred by a person in a Period (or income year) is calculated by adding together:

(a) The amount of the Total Finance Charges Excluding Interest allocated to that Period (or income year); and

(b) The amount of Interest payable or receivable in that Period (or income year).

(2) Method A and Method B find and then allocate the Total Finance Charges Excluding Interest to each Period (or an income year) of the financial arrangement. Once this amount has been allocated, the amount of Interest payable or receivable in that Period (or income year) is added to it. This gives the income or expenditure for each Period (or income year) of the financial arrangement.

(a) Method A may only be applied to Small Discount or Premium Financial Arrangements. It results in an allocation to each Period proportionate to the amount of principal outstanding in that Period, and the length of that Period.

(b) Method B may be applied to other financial arrangements. It assumes that the rate, price or index known to apply in the first Period applies to all subsequent Periods. The Act and determinations are used to spread the Total Finance Charges over the term of the financial arrangement. The assumed Interest content of the Total Finance Charges in each Period (or in each income year) is then subtracted. The yield to maturity method or other permissible method would be used for calculation purposes.

5. Interpretation

(1) In this determination, unless the context otherwise requires—

Expressions used have the same meanings as in the Act and where a word or expression is given a particular meaning for the purposes of sections 64B to 64M of the Act, it shall have the same meaning as in this determination.

“the Act” means the Income Tax Act 1976.

“Interest” does not have the meaning given in section 2 of the Act. Rather for the purposes of this determination it