456 NEW ZEALAND GAZETTE No. 22

(a) Method A of this determination cannot be used because the Small Discount or Premium Criteria are not met. That is, 2% x 3 (years) x 10,000 (average principal outstanding) = 600 which is smaller than the discount plus fees of $1,200.

(b) Apply Method B to calculate the value of x.

x = e - f

The following table sets out the allocation of the Total Finance Charges Excluding Interest (x) between the income years.

Notes:
(1) Calculated at 15.12% pa in accordance with Method A of Determination G10B: Present Value Calculation Methods.

(2) Calculated in accordance with Determination G11A: Present Value Based Yield to Maturity Method. In the 1994 income year, for example—

Total Finance Charges

(a) 9,654 Present value at year end
(b) 0 Amounts payable by holder
(c) 1,000 Amounts receivable by holder
(d) 9,253 Present value at preceding year end
= 1,401

(c) In this case, y is the actual Interest paid in a Period. Values for this example are shown in the table below.

The income deemed to be derived in each income year will be as follows:

The total is confirmed as:

1,200 discount
plus 2,750 interest actually receivable
3,950

(Note: In practice the income in the final year would be determined using the base price adjustment in section 64F of the Act.)

If the fees were payable by a borrower who was a New Zealand taxpayer with the same income year end, this taxpayer would be deemed to have incurred similar amounts of expenditure.

This determination is signed by me on the 22nd day of January in the year 1993.

R. D. ADAIR, Deputy Commissioner of Inland Revenue.

go1266

Determination G5B: Mandatory Conversion Convertible Notes

This determination may be cited as “Determination G5B: Mandatory Conversion Convertible Notes”.

1. Explanation (which does not form part of this determination).

(1) This determination replaces Determination G5A: Mandatory Conversion Convertible Notes for notes entered into on, or after, the date of publication of this determination in the Gazette.

(2) A Mandatory Conversion Convertible Note is a financial arrangement in which the holder of the Note provides money to a company, and the debt is discharged at a future date by the issue of shares (or stock) in that company only. Interest may be payable for the period between the issue of the Note and conversion into shares. Such payments are called Coupon Interest payments.

(3) As a share is an excepted financial arrangement under section 64B of the Act, only the coupon interest payments and amounts attributed to those payments by this determination are regarded as income or expenditure for the purposes of calculating accrual income or expenditure.

(4) Determination G5B prescribes the method to be used when calculating for accrual purposes the income derived or expenditure incurred in respect of a Mandatory Conversion Convertible Note. It also details which amounts are to be included for this calculation, and which are attributable to an excepted financial arrangement.

(5) Determination G5B differs from Determination G5A by providing a method for allocating coupon interest payments between seller and purchaser when a Note is sold part way through an interest period. The seller is to calculate interest that accrues before the date of sale (on a straight-line basis) and that amount is treated as the buyer’s acquisition price.

2. Reference—This determination is made pursuant to section 64E(1)(b) and (e) section 64E(6) of the Income Tax Act 1976.

3. Scope of Determination—Except where its application is specifically excluded in another determination, Determination G5B applies to every Mandatory Conversion Convertible Note which:

(1) is entered into on, or after, the date of publication in the Gazette (however, it does not apply to notes which are issued pursuant to a binding contract entered into before the date of publication); and

(2) meets the following criteria:

(a) conversion into shares of a company is at a predetermined ratio; and

(b) coupon interest payments, if any, are payable at regular intervals of not more than 12 months; and

(c) coupon interest payments are of equal amount, or are set in relation to a market interest rate indicator (if this condition is not satisfied because of the issue date or conversion date of the Note, but the rate at which the payment is calculated is consistent with the other coupon interest payments required under the Note, this determination shall apply as if the condition were met); and

(d) at the date of issue of the Note, the market value of the underlying shares amounts to at least 80% of the acquisition price of the Note; and

(e) the Note is not part of another financial arrangement.

4. Principle—(1) A Mandatory Conversion Convertible Note has both debt and equity components. It can be regarded alternatively as:

(a) a loan to a company with repayment in shares (debt component); or

(b) a forward purchase of shares (in which case the holder of the Note is buying a share of a business and has equity in it).

The accruals regime is not intended to deal with equity, and therefore classifies a share (equity in a business) as an excepted financial arrangement (see section 64B).

(2) As a Mandatory Conversion Convertible Note has this dual character, when calculating income/expenditure in relation to