19 JANUARY

NEW ZEALAND GAZETTE

147

Draw down of both loans occurs on 15 September 1993.
There are no fees.

If the New Zealand dollar amount is $20m and the spot rate
on 15 September 1993 is 0.5900, then the cashflows of the
two parties before the swap are as follows—

(brackets denote payments)

The notional principal specified in the swap contract is
NZ$20.00m = US$11.80m as at the starting date, since
these have the same value. There is no exchange of
principal on that date.

Deemed Cashflows for the Corporate under the Swap

Under the swap, the cashflows for the corporate (for the
purposes of applying this determination) are as follows:

where brackets denote payments by the corporate to the
swap counterparty.

Accrual Calculations

Therefore, in determining its assessable income, the
corporate would, using a Yield To Maturity or other
method acceptable under the Act and the determinations,
calculate:

(i) expenditure under the fixed rate loan in New Zealand
dollars (this could be done by Determination G3:
Yield to Maturity Method, or Determinations G10B:
Present Value Calculation Methods and G11A:
Present Value Based Yield to Maturity Method); and

(ii) income under the floating rate loan in United States
dollars (this could be done using Determination G26:
Variable Rate Financial Arrangements, Determination
G9A: Financial Arrangements That Are Denominated
In A Currency Or Commodity Other Than New
Zealand Dollars, and Determination G6D: Foreign
Currency Rates).

The corporate remains responsible for settling its floating
rate US dollar based loan with the original lender, and for
the margin above LIBOR.

If the original borrowings were already in existence on
15 September 1993, the analysis would be the same. Again,
no payments would need to be made between the corporate
and the swap counterparty on that date, but a notional
principal is still required to calculate the floating rate
interest amounts, and this principal would be used in the
two notional loans.

Final Calculation

To calculate income or expenditure for the final year of the
arrangement, the base price adjustment (described in
section 64F of the Act) must be applied. The formula is
a - (b + c). In making the base price adjustment at
31 March 1997, both parties are considered to be
"holders". The corporate would bring into account the
following items (assuming no exchange of principal on 15
September 1993)—

a = consideration paid or payable to the holder
= the NZ dollar equivalent of US$11.80m on
15 September 1996

• the NZ dollar equivalents of LIBOR payments
  made from 15 March 1994 to 15 September
  1996 inclusive.

b = acquisition price (assume no fees)
= value of all consideration provided by the holder
= NZ$1.25m x 6 + 20.00m
= NZ$27.50m

c = amounts of income deemed to be derived less
expenditure deemed to be incurred in the years
ending 31 March 1994 to 31 March 1996 inclusive.

(2) Example 2—Deemed Loans and a Fee Payment

Background Information

To illustrate the allocation of a fee payment, it will be
assumed that, in the example in sub-clause 7(1), the
corporate pays fees of 30BP contingent upon the
implementation of the swap, and that the corporate wishes
to pay interest in advance in relation to a loan in New
Zealand dollars.

Deemed Cashflows for the Corporate under the Swap

Therefore, under the swap, the cashflows for the corporate
(for the purposes of applying this determination) are as
follows:

where brackets denote payment by the corporate to the
swap counterparty.

Accrual Calculations

In determining its assessable income, the corporate must
take into account the fees paid and allocate them to one of
the loans. If the fees are treated by the corporate as being
attached to the US dollar loan, they may be spread on a
straight-line basis over the three years under method A of
Determination G26.

If, on the other hand, the fees were allocated to the NZ
dollar loan, they would be spread using a yield to maturity
method acceptable under the Act.

In addition, the same methods outlined in sub-clause 7 (1)
would be used to determine:

(i) expenditure under the fixed rate loan in New Zealand
dollars (for example, Determination G3, or
Determinations G10B and G11A—under these
methods the $5.5m will be spread over the term of the
swap); and

(ii) income under the floating rate loan in United States