7 MAY NEW ZEALAND GAZETTE 1411

refers may be changed or rescinded by a new determination made by the Commissioner. In such a case, a reference to the old determination is extended to the new determination.)

4. Principle

(1) If you are a party to a forward contract to which this determination applies, the gross income or expenditure in respect of the forward contract is calculated by taking into account all amounts arising from the fluctuations of exchange rates or commodity prices.

(2) The gross income or expenditure from the forward contract is the total of an expected component and the unexpected component. You must measure the expected component at the time you become a party to the forward contract. You must also recognise the unexpected component by performing the base price adjustment required under section EH 4 of the Act.

(3) To measure the expected component you must convert the base currency payments into expected NZD payments on the basis of forward rates at the time you become a party to the forward contract, and spread the expected NZD net amount over the term of the contract.

(4) You may use this determination to calculate gross income or expenditure of forward contracts entered into before the income year in which you made the election and in respect of which section EH 4 of the Act does not apply. You must then use this determination for all such forward contracts. In this case, you must follow the principle set out above except that you must calculate the expected NZD net amount using actual NZD payments up to the end of the income year in which you elect to use this determination and the forward rates at the end of that income year.

Transitional Adjustment

(5) You must perform the transitional adjustment calculation in the income year in which you elect to use this determination to calculate gross income or expenditure of any forward contract entered into before that income year.

(6) This adjustment ensures that the gross income or expenditure up to the end of the income year in which you elect to use this determination is equal to that that would have been returned, if the actual NZD payments and the forward rates, as described in sub-paragraph (4), were known and this determination had been used since you became a party to the forward contract.

5. Interpretation

In this determination:

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

(2) “Base currency” in relation to a person and a forward contract, means the currency under the forward contract which is adopted by the person as a reference currency for the purposes of this determination.

“Commencement date” of a forward contract means the date on which the contract was entered into, or the date on which it was acquired, if later.

“Contract rate”, in relation to a forward contract means the price of one currency expressed in terms of the other currency under the forward contract.

“Covered interest parity” means the theoretical 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)^n / (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 of a forward contract for commodities, the forward rate is the future value of the commodities (in NZD).

“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.

“NZD” means the currency of New Zealand.

“Non-base currency” means the currency under a forward contract that is not the base currency.

“Spot contract” means a contract for the sale or purchase of a currency for delivery in 2 business days.

“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.

(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 forward contract under this determination is the total of:

(A) the expected component, calculated in accordance with sub-paragraphs (4) to (7); and

(B) the unexpected component, calculated in accordance with sub-paragraph (8).

(2) To calculate the income or expenditure in relation to a forward contract, you must first nominate a base currency.

(3) If the terms of the forward contract provide for the netting off or offsetting of any amounts payable to or by one party to the forward contract with any amounts payable to or by the other party to the forward contract, you must ignore such netting off or offsetting for the purpose of this determination.

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

(a) the base currency value of the payment or receipt, if any, made in consideration of entering into the forward contract;

(b) the base currency value of the non-base currency;