NEW ZEALAND GAZETTE

No. 131

Agreements for Sale and Purchase of Property Denominated in Foreign Currency: Discounted Value of Amounts Payable

This Determination may be cited as “Determination G21A : Agreements for Sale and Purchase of Property Denominated in Foreign Currency: Discounted Value of Amounts Payable”.

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

What financial arrangements does this determination apply to?

(1) This determination applies to any agreement for the sale and purchase of property (or ‘ASAP’) which is subject to the accrual rules, if the price for the property is denominated in a foreign currency (a ‘foreign currency ASAP’), and certain other conditions are met. It does not apply to a short term ASAP or a private or domestic ASAP (as those terms are defined in the Act), because these agreements are excepted financial arrangements.

General principles of taxation of foreign currency ASAPs

(2) For all ASAPs (whether or not denominated in a foreign currency) which are subject to the accrual rules, you must calculate a core acquisition price. This is the total of:

(a)(i) the lowest price that you and the other party would have agreed upon for the property at the time the ASAP was entered into, on the basis of payment in full at the time the first right in the specified property is to be transferred; or

(ii) if there is no such lowest price, the discounted value of the amounts payable for the property as determined under a determination; or

(iii) if there is no such lowest price, and no applicable determination, the value of the property provided by the seller; and

(b) any other amounts paid by the seller to the buyer (for purposes of explanation, these can safely be ignored).

(3) This determination prescribes the method for determining the discounted value, in the foreign currency, of the amounts payable for the property, as set out in paragraph (2)(a)(ii).

(4) For these purposes any amount determined in a currency other than NZ$ is required to be discounted using an interest rate appropriate to the currency. This determination requires the use of a foreign currency interest rate ascertained as at the rights date using a method consistent with Determination G13A: Prices or Yields—this interest rate is the interbank offer rate for the currency and the term of the foreign currency ASAP.

(5) The amounts payable are then discounted to the rights date, using the interest rate so ascertained and present value calculation Method A in Determination G10B: Present Value Calculation Methods or an alternative method producing not materially different results.

(6) Once this amount has been determined, you must convert it into NZ$ using one of the following rates:

• forward rate to rights date (Rate A);
• forward rate to settlement date (Rate B);
• spot rate at rights date (Rate C);
• spot rate at contract date (Rate D); or
• spot rate at settlement date (Rate E);

as set out in paragraph (5) of Method. Use of these rates is subject to certain restrictions, set out in paragraphs 3(2), 3(3), 4 and 5 below.

(7) Having calculated the NZ$ value of the core acquisition price, you must calculate your income or expenditure from the foreign currency ASAP using the corresponding method in determination G29.

(8) The NZ$ value of the foreign currency lowest price is also the price at which the property is deemed to have been sold or acquired by you for income tax purposes (under section EH 8(2)).

How does this determination differ from G21?

(9) This determination differs from Determination G21 by:

(a) removing the option to discount future amounts payable under a foreign currency ASAP using a NZ$ interest rate;

(b) removing the requirement to convert the discounted value of amounts payable using the spot rate on the rights date.

2. Reference

(1) This determination is made pursuant to section 90(1)(h) of the Tax Administration Act 1994.

(2) This determination rescinds and replaces Determination G21: Discounted Value of Amounts Payable in Relation to Deferred Property Settlements Denominated in a Foreign Currency, with effect from the 1996/97 income year.

3. Scope of Determination

(1) Subject to paragraphs (2), (3), (4) and (5), this determination applies to the calculation of income or expenditure under any foreign currency ASAP:

(a) if there is no lowest price; and

(b) with respect to which you become a party in your 1996-97 income year or a subsequent income year.

(2) This determination does not apply:

(a) To any deferred property settlement where more than 20% of the sum of all the amounts payable is due before 31 days prior to the rights date; or

(b) Where in relation to any deferred property settlement any amount payable, or the date on which any amount is payable, is not known at the first balance date of the person after the transfer date; or

(c) Where the term of the deferred property settlement is not known at the first balance date after the transfer date.

(3) You may use Rate B only if the period between the rights date and the settlement date (date of final payment) of the foreign currency ASAP is not more than five years.

(4) You may use Rates C and D only if the property that is the subject of the foreign currency ASAP is trading stock in relation to you, other than land or shares.

(5) You may use Rate E only if the aggregate of your gross income (as defined in the Act) and that of all associated persons, in the income year you became a party to the foreign currency ASAP, does not exceed $2,500,000. For this purpose, gross income should be adjusted by excluding any income from foreign currency ASAPs which are subject to section EH 1 in the income year.

4. Principle

Under the qualified accrual rules a foreign currency ASAP gives rise to income or expenditure equal to the difference between the NZ$ value of the acquisition price of the ASAP and the NZ$ value of the price.

(2) The acquisition price is equal to the core acquisition price less (in the case of the holder) or plus (in the case of the issuer) any non-contingent fees paid by that party that qualify as item z in the definition of core acquisition price in the Act.

(3) The core acquisition price is defined in section OB 1. In the case of an ASAP, the definition provides that in certain circumstances, the core acquisition price should be the discounted value of the amounts payable for the property, determined under a determination made by the Commissioner.