452 NEW ZEALAND GAZETTE No. 22

means any periodic payment in relation to the financial arrangement, to the extent intended to provide a return to the lender on the sums provided to the borrower. It does not include fees, discounts, or premiums, or payments effecting a reduction of principal.

"Period" means a term commencing immediately after a payment is payable or receivable, and ending when the next payment is payable or receivable. Where the Period is longer than one year, the Period is deemed to comprise one or more Periods each of one year followed (or preceded, at the option of the holder or issuer as the case may be) by a Period of less than one year.

The duration of the financial arrangement should be evenly divided into Periods, which may be measured in days, weeks, fortnights, months, quarters, half years, or years. If an even division is not possible, then the remainder should be treated as a partial Period, and expressed as a fraction of a full Period.

m × n

o

where

m = the number of days in the partial Period
n = number of full Periods in a year
o = number of days in a year

For example, if all other Periods are measured in months then a Period of 5 days would be treated as

5 × 12
------ = 0.1644 of a month
65

There must be no more than two partial Periods in any financial arrangement.

"Small Discount or Premium Financial Arrangements" means a financial arrangement to which this determination applies, in respect of which—

(a) The only variable parts of an amount payable comprise Interest which is:

(i) Payable at yearly or more frequent intervals; and

(ii) Is calculated on the amount of the principal outstanding from time to time since the previous Interest payment (or since the date of issue or acquisition if that is later); and

(b) The amount of the Total Finance Charges Excluding Interest (ignoring whether it is a positive or negative amount) is not more than the product of:

(i) Two per cent; and

(ii) The expected term of the financial arrangement calculated in years and fractions of a year; and

(iii) The time-weighted average amount of principal that is reasonably expected to be outstanding during the expected term of the financial arrangement.

Clause 7 of this determination provides examples which show whether or not a financial arrangement is a Small Discount or Premium Financial Arrangement.

"Total Finance Charges" in relation to a financial arrangement means—

(a) For an issuer, the total of all amounts payable by the issuer less the total of all amounts receivable by the issuer, pursuant to the financial arrangement:

(b) For a holder, the total of all amounts receivable by the holder less the total of all amounts payable by the holder, pursuant to a financial arrangement.

Any fees payable in relation to the financial arrangement must be reduced by the amount of item z as defined in sections 64BA (2) or 64BA (3) of the Act.

"Total Finance Charges Excluding Interest" in relation to a financial arrangement means the Total Finance Charges excluding all amounts of Interest payable or receivable.

(2) For convenience, words and phrases defined in this determination are indicated by initial capital letters, but the absence of a capital letter shall not alone imply that the word or phrase is used with a meaning different from that given by its definition.

6. Method—(1) A person may apply Method A to Small Discount or Premium Financial Arrangements, and Method B to any other financial arrangement. In order to determine whether Method A can be applied, use the criteria outlined in the Interpretation clause of this determination.

(2) Method A shall be applied in respect of Periods. Method B may be applied either in respect of income years or Periods.

(3) The proviso to paragraph (a) of section 64C (3) of the Act allows for another method, similar to those in this determination, to also be used.

(4) Once a method has been selected for a financial arrangement, that method must be applied until the financial arrangement matures or is remitted, sold, or otherwise transferred by the person unless the prior consent of the Commissioner to adopt another method is obtained. (The Commissioner’s consent may be given conditionally).

(5) A person who:

(a) is a holder; and

(b) who receives a premium or fee on the issue or acquisition of a financial arrangement

may elect to include that fee or premium in the income derived by that person in the income year of issue or acquisition.

(6) The formula

x + y

is used to calculate the income derived or expenditure incurred by a person in a Period (or an income year) in relation to the financial arrangement. In this formula:

"x" is the amount of Total Finance Charges Excluding Interest allocated to that Period (or to that income year); and

"y" is the amount of Interest payable or receivable in that Period (or that income year).

(7) Method A and Method B differ in the method used to calculate the value of x.

(a) Under Method A

x = a × b × c
d

where,

"a" is the Total Finance Charges Excluding Interest payable by the issuer or receivable by the holder as the case may be;

"b" is the length of the Period (b = 1 if the Period in question is a full Period, or, for a partial Period, b = a fraction calculated in accordance with the formula given in the clause 5 Interpretation);

"c" is the amount of principal outstanding during the Period;

"d" is the sum of all items (b × c) calculated in respect of every Period;

(b) Under Method B

x = e − f

Since, in a variable rate arrangement, the rate, price, or index varies during the term of the arrangement, the assumption is made that the rate, price or index that applies to the first Period after the date of issue or acquisition applies to all Periods of the financial arrangement. Using the assumption:

"e" is the income derived, or the expenditure incurred, for a Period (or income year); and

"f" is the Interest deemed to be payable by the issuer or receivable by the holder as the case may be.