18 FEBRUARY NEW ZEALAND GAZETTE

457

the Note it is first necessary to separate the debt and equity components of the Note.

(3) This determination specifies that, apart from the coupon interest payments and amounts attributed to those payments by this determination, all amounts relate to the underlying shares (equity component), and will not be dealt with under the accruals regime (sections 64B to 64M) when calculating assessable income.

(4) Income and expenditure in respect of the Note is calculated by pro-rata daily apportionment of the coupon interest payment to income years.

(5) For the purposes of this determination it is assumed that any change in the market value of the shares between the issue date of the Note and the conversion into shares is due to the equity component. Therefore the difference in share price can be ignored when calculating income and expenditure.

5. Interpretation

In this determination, unless the context otherwise requires:

(1) Expressions used, except the expression “income year”, have the same meaning as in section 2 and section 64B of the Income Tax Act 1976.

(a) The “Act” means the Income Tax Act 1976.

(b) “Coupon Interest Payment” means any amount payable on the Note by the Note issuer (borrower) to the Note holder (lender) other than payments relating to the redemption or conversion of the Note.

(c) “Income Year”

(i) When a taxpayer furnishes a return of income under section 15 of the Act for an accounting year ending with a balance date other than the 31st day of March, “income year” means the period of twelve months ending on that balance date.

(ii) For any other person, “income year” means the year ending 31 March in which the income has been derived or expenditure has been incurred by that person.

(d) “Mandatory Conversion Convertible Note”, or “Note” means any debenture, bond, certificate, document, Note or writing issued or given by a company:

(i) which provides evidence that the company is indebted to the holder of the Note, whether for a loan to the company, money subscribed to the company or any other liability of the company (whether or not the amount for which the company has issued the Note is secured over the undertaking or any of the assets of the company); and

(ii) which provides for the debt to be discharged only by the issue of shares in the capital of the company. This may be pursuant to a trust deed.

(e) “Underlying Shares” in relation to a Note means the shares or stock into which the Note is convertible, or in which it may be redeemed or paid.

(2) A determination to which Determination G5B 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.

(3) 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) Amounts to be included when calculating income or expenditure with regard to a Mandatory Conversion Convertible Note:

(a) In respect of income, gain or loss, or expenditure, and also of any other consideration receivable by the holder or payable by the issuer, the amounts taken into account to calculate income/expenditure consist of:

(i) coupon interest payments;

(ii) amounts attributed to coupon interest payments as set out in subclause 6 (3).

(b) In respect of the acquisition price, the amounts to be included when calculating income/expenditure are those attributed to coupon interest payments as set out in subclause 6 (4).

(2) The income derived or expenditure incurred in respect of a Mandatory Conversion Convertible Note shall be calculated by daily apportionment of the coupon interest payments to income years. For the method, see Determination G1A: Apportionment of Daily Income and Expenditure.

(3) If a Mandatory Conversion Convertible Note on which interest is payable is sold part way through an interest period, then it is necessary to apportion the coupon interest payment between the seller and the purchaser. The seller is allocated interest, on a daily straight line basis, that accrues before the date of sale. (See Example C).

Note: If the coupon interest payment is not known until after the date of sale, it shall be assumed to be equal to the coupon interest payment for the previous period (adjusted for any difference in the length of the period).

(4) The portion of the sale price thus attributed to accrued interest and allocated to the seller is, in turn, treated as the purchaser’s acquisition price of the financial arrangement. If the purchaser later receives the coupon interest payment for the sale period, then this acquisition price may be immediately offset against the amount received when calculating the amount of income derived from the financial arrangement in that year. (See Example C).

7. Example

EXAMPLE A

On 13 September 1987 a convertible Note is issued for $100 with an interest coupon of 12% payable half-yearly in arrears. The Note is mandatorily convertible on 13th September 1988 to 10 shares in the issuing company.

The market value of each share at issue date is $9.00. By conversion date this has risen to $15.00.

Both the issuer and the holder use a 31 March balance date and apply Determination G1A on a 365 day basis when apportioning daily income and expenditure.

The coupon interest payments are made as follows:

(a) Year ended 31 March 1988

Coupon payment 13/3/88...
Apportionment of coupon payment due on 13/9/88

There are 18 days between 13 March and 31 March 1988, and 184 days between 13 March and 13 September 1988

18/184 X $6.00
= $0.59

Income/Expenditure $6.59

(b) Year ended 31 March 1989

As the Note matures in this year the base price adjustment (section 64F of the Act) is required. The formula a = (b + c) is applied:

a = the sum of all amounts paid ($12.00)
b = acquisition price
c = income/expenditure in previous years ($6.59)

As all amounts other than the coupon payments are attributable to the underlying shares, the issue price and sharemarket value can be ignored for the purposes of calculating income and expenditure.