MARCH NEW ZEALAND GAZETTE

3 981

provides money to a company, and the debt is discharged at a future date by the issue of shares (or stock) in any company. 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 amount attributed to those payments by this determination are regarded as income or expenditure for the purposes of calculating accrual income or expenditure.

(4) Determination G5C 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 G5C differs from Determination G5B by:

(a) broadening the scope of the determination so that it applies to a Mandatory Conversion Convertible Note converting into shares in a company other than the company that issued the Note; and

(b) narrowing the scope of the determination so that it only applies to a Mandatory Conversion Convertible Note where the interest rate is not less than 5% p.a. (or half of the interest rate the issuer would have paid on cash repayment borrowings if lower) nor more than 15% p.a. (or double the interest rate the issuer would have paid on cash repayment borrowings if higher).

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

3. Scope of Determination—Except where its application is specifically excluded in another determination, Determination G5C applies to every Mandatory Conversion Convertible Note which:

(1) Is entered into on, or after, the date of publication in the New Zealand 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 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) the constant annual rate R calculated using Determination G3: Yield to Maturity Method, applied to the Mandatory Conversion Convertible Note is:

(i) not less than the lesser of:

(A) 5% p.a.; or

(B) twice the coupon which the company issuing the Note would have had to pay on similarly secured borrowings of similar amount as at the date of issue; and

(ii) not more than the greater of:

(A) 15% p.a.; or

(B) twice the coupon which the company issuing the Note would have had to pay on similarly secured borrowings of similar amount as at the date of issue; and

taking into account the amount or amounts payable by the holder consequent upon issue and assuming that—

(iii) Coupon Interest Payments will be paid to the holder in accordance with the terms of the Note provided that if the Coupon Interest Payments are set in relation to a market interest rate indicator, the value of that indicator as at the issue date shall be assumed to apply for the term of the Note; and

(iv) the only payment (other than a coupon payment) made to the holder on the conversion of the Note is a cash payment equal to the issue 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 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.

(6) This approach may not be appropriate where the coupon interest rate is so much above or below market rates at the time of issue that it may represent an adjustment between the acquisition price of the Mandatory Conversion Convertible Note and the expected value, as at the time of issue of the underlying shares at the time of conversion. This determination has therefore been limited as set out in paragraph (d) of subclause 3(2).

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