NEW ZEALAND GAZETTE

No. 62

1408

(1) A reference to the "Act" is a reference to the Income Tax Act 1994.

(2) "Base currency" in relation to a financial arrangement means the currency or commodity in which rights and obligations under the financial arrangement are fixed.

"Covered interest parity" means the proposition that the differential between forward and spot exchange rates is equal to the interest differentials. That is, the forward rate for a foreign currency exchange at time t for 1 period ahead is equivalent to the spot rate at time t, S_t, multiplied by one plus the foreign interest rate, i_f, divided by one plus the domestic interest rate, i_d. Forward rates at time t for n periods, Fwd_t,n, can thus be derived based on the principle of covered interest parity as

Fwd_t,n = S_t (1 + i_f / 1 + i_d)^n

"Currency" includes any commodity used as a medium of exchange or account, whether in general use or for the purpose of an arrangement.

"Exchange rate" means the price of one currency expressed in another currency.

"Forward rate" means the exchange rate for a forward contract as defined in Determination G6D: Foreign Currency Rates or the forward exchange rate calculated using the principle of covered interest parity or other methods that are commercially acceptable. In the case where the base currency is a commodity, the forward rate is the future value of the commodity (in NZD).

"Financial arrangement" has the same meaning as in the Act: Provided that, where a financial arrangement creates obligations in two or more currencies or commodities and the consideration to be given and received in respect of the obligations in each of the currencies is separately identifiable, the consideration to be given and received in respect of obligations in each currency will be treated as relating to separate financial arrangements.

"Floating rate arrangement" means a financial arrangement where the interest rate is reset periodically according to a predetermined formula, linking the interest rate to an indicator rate such as the bank bill or interbank rate.

"Future value" in relation to a commodity and a future date means the value of the commodity at the future date, on a given date, derived from any commercially acceptable, market-based method of valuation.

"GBP" means the currency of the United Kingdom.

"Initial interest rate" in relation to a financial arrangement means the interest rate that applies to the first period after the date of issue or acquisition of the financial arrangement.

"Interest" means any periodic payment in relation to the financial arrangement, to the extent intended to provide a return to the lender on the sums provided to the borrower. It does not include fees, discounts, or premiums, or payments effecting a reduction of principal.

"NZD" means the currency of New Zealand.

"Period" means a term commencing immediately after a payment is payable or receivable, and ending when the next payment is payable or receivable.

"Reviewable rate arrangement" means a financial arrangement where the interest rate is set periodically in line with market rates.

"Spot rate" means the exchange rate for a spot contract as defined in Determination G6D: Foreign Currency Rates or in the case of a commodity, the spot value (in NZD) of the commodity.

"Spot value" in relation to a commodity and a day means the value of the commodity on that day derived from any commercially acceptable method of valuation.

"USD" means the currency of the United States of America.

"Variable rate financial arrangement" means a floating rate arrangement or a reviewable rate arrangement.

(3) All other terms used have the same meaning given to them for the purpose of the qualified accruals rules in the Act.

6. Method

(1) Your gross income or expenditure in an income year from a financial arrangement under this determination is the total of:

(A) the expected component, calculated in accordance with sub-paragraphs (2) to (5); and

(B) the unexpected component, calculated in accordance with sub-paragraph (6) of this section.

(2) You must calculate the expected component for each income year of the remaining term of the financial arrangement at the time you become a party to the financial arrangement. The expected component is calculated by first taking into account all base currency payments in relation to the financial arrangement.

(3) You must calculate the base currency payments of a variable rate financial arrangement denominated in a currency other than NZD using the initial interest rate and assuming that this rate will apply throughout the term of the financial arrangement.

(4) You must convert the base currency payments into NZD using forward rates at the time you became a party to the financial arrangement.

(5) You must spread the expected NZD net amount using the yield to maturity method consistent with Determination G3 and, where necessary, allocate it to the income year on the basis of Determination G1A. This will give the expected component for each income year.

(6) The unexpected component is the difference between the actual NZD value of the payments during the year and the expected NZD value of those payments as calculated under sub-paragraph (4).

Transitional Adjustment for Existing Financial Arrangements

(7) If you elect to use this determination to calculate gross income or expenditure of any financial arrangement entered into before the income year you made the election, you must follow the method set out in sub-paragraphs (1) to (6) to calculate gross income or expenditure of these financial arrangements, except that:

(a) the NZD net amount to be spread under sub-paragraph (5) consists of actual NZD payments that have occurred since you became a party to the financial arrangement until the end of the income year you elect to use this determination, and expected NZD payments in the remaining term of the financial arrangement; and

(b) the expected NZD payments in the remaining term of the financial arrangement must be calculated on the basis of the forward rates available at the end of the income year you elect to use this determination.

(8) You must perform a transitional adjustment calculation in the income year in which you elect to use this determination to calculate gross income or expenditure of