NEW ZEALAND GAZETTE

No. 85

1946

growth in value of the Units that is solely attributable to an expected financial arrangement as well as the method for spreading the accrual income, gain or loss, or expenditure under the Qualified Accruals Rules.

(9) For the avoidance of doubt, this Determination does not apply to persons other than Investors, being the plural of the term “Investor” as that is defined in the Interpretation section of this Determination.

4. Principle

(1) The low interest rate payable on the loan of the proceeds of the Convertible Note issue to the Unit Trust means that any increase in the value of a Unit is not solely attributable to an expected financial arrangement. As the Convertible Note and the Unit are both part of a wider financial arrangement, part (or possibly all) of any increase in the value of a Unit is income attributable to the Convertible Notes for the purposes of the Qualified Accruals Rules.

(2) The amount of growth in value of a Unit that is solely attributable to expected financial arrangement is determined by deducting the part of the increase in value of the Unit that can properly be attributed to the non-market interest rate payable on the loan by the Issuer to the Unit Trust.

5. Interpretation

(1) In this Determination, unless the context otherwise requires—

(a) the “Act” means the Income Tax Act 1994;

(b) “Convertible Note” means any of the notes to be issued by the Issuer with the following terms:

(i) The Convertible Notes are not redeemable for cash;

(ii) The Convertible Notes entitle the holder to elect, by giving 10 days’ notice to the Issuer prior to 31 July in any year, to elect to convert the Convertible Note into Units in the XYZ Unit Trust as at 31 July;

(iii) Any conversion will be at the unit value at the preceding 31 March;

(iv) Interest will accrue on a daily basis at a rate of 2% per annum on the principal amount outstanding from time to time;

(v) Payments of interest will be made annually and repayments of principal will be made by equal annual instalments of one quarter of the initial principal.

(c) “Investor” means a person who subscribes for Convertible Notes issued by the Issuer and Units issued by the Unit Trust.

(d) “Qualified Accruals Rules” means the accruals rules and sections EH 9 and FF 2 of the Act.

(e) “Units” means the units in the Unit Trust.

(2) For convenience, words and phrases defined in this Determination are indicated by initial capital letters, but the absence of a capital letter shall not alone imply that the word or phrase is used with a meaning different from that given by its definition.

(3) A determination to which this Determination 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 taken to be extended to the new determination.

6. Method

(1) The amount of increase in value of a Unit that is not solely attributable to an expected financial arrangement, and is therefore subject to the Qualified Accruals Rules, is calculated as follows:

(a) The increase in value of the Unit is the amount by which the market value of the Unit exceeds the cost of the Unit (the “Gain”). If the cost of the Unit is greater than or equal to the market value of the Unit, then there will be no Gain and any difference between the cost and market value will be solely attributable to an expected financial arrangement. There will be no amount which will be included as gross income under the Qualified Accruals Rules.

(b) Where there is a Gain, part of the Gain will be attributable to the low rate of interest. The amount that is attributable to the low rate of interest (the “Interest Advantage”) is the difference between the specified rate and 2% multiplied by the amount of principal outstanding. However, there may be difficulties in determining the daily balance in cases where part repayment of the principal outstanding occurs during the income year rather than on 31 March. These difficulties may be avoided by using the amount of interest payable during the year divided by 2% as a substitute for the weighted average of the amount of principal outstanding during the income year. The Interest Advantage is therefore calculated using the following formula:

SR - R
----- × AI ; where:
 R

“SR” is the specified rate prescribed by Determination G23: Specified Rate, calculated in accordance with Determination G13A: Prices or Yields based on the term of the loan between the Issuer and the Unit Trust;

“R” is the interest rate of 2% per annum; and

“AI” is the sum of the amounts for each income year since the Convertible Notes and Units were issued calculated in accordance with the formula:

I + U ; where:

“I” is the total interest payable by the Unit Trust on the loan from the Issuer to the Unit Trust, for the relevant income year or part year; and

“U” is the number of Units on issue from the Unit Trust at the end of the relevant income year or part year calculated on a weighted average basis to take into account any Units arising from the conversion of Convertible Notes.

(c) Where the Gain is greater than the Interest Advantage, then any amount over and above the Interest Advantage will be solely attributable to the expected financial arrangement (being the Units) and not subject to the Qualified Accruals Rules. The Interest Advantage will not be solely attributable to an expected financial arrangement and will be subject to the Qualified Accruals Rules.

Where the Interest Advantage is greater than the Gain, all of the Gain will be subject to the Qualified Accruals Rules.

(d) To determine the amount deemed to be gross income under the Qualified Accruals Rules, an adjustment must be made to the amount subject to the Qualified Accruals Rules under clause 6 (1) (c) of this Determination. The following amount must be subtracted from the amount subject to the Qualified Accruals Rules referred to in clause 6 (1) (c) of this Determination. The amount to be subtracted comprises the total of all amounts previously deemed to be gross income under clause 6 (1) (d) of this Determination less any amounts previously allowed as a deduction under clause 6 (1) (d) of this Determination.

(2) Any interest payment received by an Investor on the Convertible Notes is attributable to the Convertible Notes and is therefore not solely attributable to any expected financial arrangement. As such, it will be included as gross income under the Qualified Accruals Rules.

(3) Any distribution paid by the Unit Trust to an Investor is solely attributable to an expected financial arrangement.