11 JUNE NEW ZEALAND GAZETTE 1757

Income Tax Act 1994. The equity components that are excepted financial arrangements are:

• the option for the Noteholder to acquire shares in Parent Co on the happening of a conversion event prior to Maturity by redeeming the Notes and using the Redemption Proceeds to purchase the shares; and
• the shares in Parent Co.

5. The amount of gross income deemed to be derived or expenditure deemed to be incurred by a person under the qualified accrual rules in respect of a financial arrangement excludes any amount of income, gain or loss, or expenditure that is solely attributable to an excepted financial arrangement.

6. This determination prescribes a method to be used when calculating for accrual purposes, the gross income derived or expenditure incurred in respect of the Notes.

Reference

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

2. Determination G5C does not apply to the Notes as the Notes are not Mandatory Conversion Convertible Notes. Determination G22 does not apply as the Notes are denominated in Australian dollars.

Scope of Determination

1. This determination applies specifically to the Notes issued pursuant to an Information Memorandum For the Issue and Private Placement of Converting Notes by NZ Co Denominated in Australian Dollars dated 17 March 1998, where:

   (a) The Notes will be unsecured but guaranteed by Parent Co. The guarantee is subordinated to the rights of other commercial debt holders, but will rank pari passu with Parent Co’s obligations to any other Noteholders the company has.

   (b) Noteholders do not participate in any dividends or any other distributions made in respect of shares. The Notes carry no voting rights.

   (c) The Notes carry a fixed coupon (semi-annual) rate of interest. The rate is to be set by reference to the 5-year swap bid rate as published on AFMA page 45.402 at the date of issue, and the spread will take account of the rating of Parent Co by Standard & Poors at the time of issue, the subordinated nature of the Notes and the uncertainty over the ownership of the guarantor. The interest rate on the Notes is set on a stand alone basis having regard to the terms of the Notes alone, and without reference to the shares in Parent Co. Pursuant to the guarantee by Parent Co, NZ Co will suspend the Coupon Interest where Parent Co does not declare a dividend for a half-year period. Any suspension of the Coupon Interest is non-cumulative.

   (d) The Notes are issued with mandatory “conversion” at the end of 5 years from the anniversary of the issue. At various times (on the happening of a conversion event) from the end of the third year from the date of issue, the Noteholder has the option to convert the Note into ordinary shares in Parent Co. NZ Co has the option at maturity to redeem the Notes for cash rather than convert to “shares”.

   (e) The mechanism by which Notes are “converted” is NZ Co will redeem the Notes in cash for their Face Value and the Noteholder is obliged to use those Redemption Proceeds to acquire shares in Parent Co.

   (f) The Noteholder will receive shares in Parent Co at a 5 percent discount to the market price at the date of conversion (subject to a minimum conversion price of A$0.25 which equals the par value of the shares). The 5 percent discount is in recognition that the Noteholder holds a debt instrument and would likely wish to immediately realise the shares acquired. The various transaction costs associated with share realisation and the risks of downward share price movement on large scale share sales, require that the Noteholder be compensated to ensure the Noteholder is in the same position had it simply received cash equal to the face value of the debt. The 5 percent discount on the market price is to ensure the Noteholder can in essence realise the equivalent of the face value of the debt on liquidating its position in Parent Co.

   (g) The Noteholder also has a right to elect to convert the Notes and receive a maximum of 6 months’ interest (or “Termination Fee”) in the event interest is suspended (as outlined in paragraph (c) above). Additional rights of conversion are available in certain circumstances (such as in certain exceptional default events such as Parent Co delisting, issue of a bonus issue by Parent Co, or on an announcement of a takeover).

   (h) At maturity of the Note, rather than requiring the Noteholders to purchase shares in Parent Co, NZ Co may elect to redeem the Notes at their Face Value plus an amount of Additional Interest equal to 5 percent of the Face Value. Under this cash redemption option, NZ Co will pay the Noteholder and the amount of Additional Interest will be reimbursed to NZ Co by Parent Co or one of its subsidiaries.

   (i) In the event of a change in control of Parent Co, NZ Co may also elect to redeem the Notes for the Cash Redemption Amount.

Principle

1. The Note forms part of a wider financial arrangement which has both a debt component, and equity components in that are “excepted financial arrangements” as defined in section OB 1 of the Income Tax Act 1994. The equity components that are excepted financial arrangements are:

   • the option for the Noteholder to acquire shares in Parent Co on the happening of a conversion event prior to Maturity by redeeming the Notes and using the Redemption Proceeds to purchase the shares; and
   • the shares in Parent Co.

The option that NZ Co has to require the Noteholders to use the Redemption Proceeds to purchase shares in Parent Co does not satisfy the definition of “excepted financial arrangement”.

2. Any income, gain or loss, or expenditure that is solely attributable to an excepted financial arrangement is not included when calculating gross income or expenditure under the qualified accrual rules.

3. This determination specifies that no amounts are attributable to the excepted financial arrangements.

Interpretation

1. In this determination, the following expressions (which have not been defined elsewhere within the determination) have the following meanings:

   “Additional Interest” means 5 percent of the Face Value of the Note.

   “Cash Redemption Amount” means the cash amount expressed in Australian dollars being the amount which the Noteholder would receive upon the exercise by NZ Co of the right to redeem the Notes in cash.