19 JANUARY
NEW ZEALAND GAZETTE
143

side of the swap will be those obligations expressed in the other currency. In the case of other types of interest swaps, the sides of the swap reflect the different bases upon which interest is payable.

It is not necessary for there to be a physical exchange of principal at the beginning and/or end of the swap, in addition to the interest or other payments during the term of the swap.

A swap is a financial arrangement subject to the accrual provisions of the Income Tax Act 1976. This determination sets out the method to be used to calculate income and expenditure under those provisions for swaps to which it applies.

What methods can be used to calculate income and expenditure under a swap to which this determination applies?

Use A, B, C or D.

A A method that has regard to market valuation under section 64C(4) of the Act. This method can be used where your business comprises dealing in swaps, or where the swap constitutes a forward or future contract for foreign exchange.

Where the requirements of section 64C(4) are satisfied, and you choose to use a method under that provision, this determination:

• requires that you adopt a mark to market method,
• requires that (so far as possible) you adopt that method in a consistent manner over the term of the swap, and
• specifies the markets and sources of information which you must use.

B The method specified in Determination G14: Forward Contracts For Foreign Exchange And Commodities. Use this method where the swap involves a spot exchange at the current market spot rate and a future exchange of fixed amounts at a single fixed date and you do not adopt a method under section 64C(4).

C The method provided for in this Determination.

Use this method if you do not adopt a method under section 64C(4) and Determination G14 does not apply. This method requires you to:

• treat the swap as if it comprised two simultaneous loans, one from each party to the other, and
• then apply the normal accrual rules to these deemed loans.

In this way, the appropriate recognition of income or expenditure under the swap (for income tax purposes) will result from the net effect of the combination of your accounting for the two deemed loans.

D A method that satisfies the requirements of the proviso to paragraph (a) of section 64C(3) of the Act. You can use this method if it:

• has regard to the principles of accrual accounting,
• conforms with commercially acceptable practice,
• (except to the extent that the Commissioner may otherwise allow under section 64C(4A) of the Act) is adopted, and is or will be consistently applied, by you in respect of all such financial arrangements for financial reporting purposes, and
• results in the allocation, to each income year, of amounts that are not materially different from the amounts that would be calculated under Method C.

How to use method C

Under this method

• ignore any offsetting of payments between the parties, so that every amount that would be payable under each side of the swap (if no provision was made for offsetting) is attributed to the relevant deemed loan and taken into account;
• treat each side of the swap as a separate loan of the appropriate amount, being the amount that is used to calculate the payments to be made under that side of the swap during its term. [In situations where the swap contract does not provide for the Principal Amount relating to each side of the swap to be both paid on the Effective Date and repaid on the Maturity Date, this Determination treats such payment and repayment as taking place, by specifying the actual and deemed cashflows that are to be taken into account in the calculation of each party’s income or expenditure under each side of the swap];
• take into account, as cashflows subject to the yield to maturity or other method of calculating income or expenditure applicable under the accrual provisions or relevant determinations, fees payable in relation to the swap that qualify as Fee Amounts (reduced by the amount of item z in section 64BA(2) or 64BA(3) of the Act), any payment made that is intended to compensate one of the parties for a difference in the values of the anticipated cashflows under the swap, and any consideration paid in connection with the assignment of a swap by or to an assignee. [Apply each of them to only one of the two loans that the swap is deemed to comprise. You must elect which of the loans is to be treated in this way.];
• then, calculate the income derived or expenditure incurred by you for each of these deemed loans by applying the accrual provisions of the Act and determinations that would be applicable to such cashflows;
• where the relevant deemed loan is denominated in a currency other than New Zealand dollars and the swap does not provide for any actual payment of principal on the Maturity Date, and you are applying Determination G9A in calculating the income or expenditure, ignore any actual or deemed payments of principal on the Effective Date when applying Determination G9A (except for the calculation of base currency income and expenditure). [This is to ensure that the calculations do not take account of fluctuations in the New Zealand dollar value of principal amounts denominated in the other currency where there is no actual repayment of principal].

How are the parties to a swap described?

According to the definition in the Act, each party is a “holder” in relation to the swap. However, since the swap is treated as if it comprised two simultaneous loans, each party will be a “holder” and an “issuer” for the purposes of the calculations under this Determination.

How is income or expenditure calculated in the year the swap matures or is disposed of?

Calculate income or expenditure under the base price adjustment described in section 64F of the Act. Make that adjustment in relation to the swap as a whole, and treat each party as a “holder”.

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

3. Scope of Determination—This determination applies to any arrangement that is an Interest Rate Swap, Interest Swap, Currency Swap, Interest Rate and Currency Swap, or Interest and Currency Swap entered into after the date upon which this determination is published in the New Zealand