25 JUNE NEW ZEALAND GAZETTE 1947

(being the Units) and not subject to the Qualified Accruals Rules.

7. Examples

Example One

An Investor who is a cash basis holder invests in Convertible Notes and Units on the following terms:

• the Investor subscribes for and receives 4,000 $1 Units and 8,000 $1 Convertible Notes which bear interest at a rate of 2% per annum on 1 April 1998

• the total number of $1 Convertible Notes issued by the Issuer is 80,000, with the number of $1 Units issued by the Unit Trust being 40,000. The proceeds from the issue of the Convertible Notes (being $80,000) is loaned from the Issuer to the Unit Trust for a period of four years bearing interest at 2% per annum (meaning that the Unit Trust will repay to the Issuer $20,000 on 31 March each year starting on 31 March 1999), plus interest on the balance of the loan calculated on a daily basis

• the Convertible Notes held by the Investor are redeemed at a rate of 2,000 Notes per year (meaning the Investor receives $2,000 on 31 March each year)

• the market value of the Units in the Unit Trust at the end of each of the four income years are as follows:

• on 31 March 2002, an income distribution of $0.25 per Unit is paid to Investors by the Unit Trust

• no Investors exercise the option to convert the Convertible Notes

• the “specified rate” is to be determined in accordance with Determination G23 and Determination G13A, based on the term of the loan between the Issuer and the Unit Trust. The term of the loan is from 1 April 1998 to 31 March 2002. Applying Determination G23, the specified rate will be the yield for New Zealand Government Stock of a similar term to the loan determined in accordance with Determination G13A. Under Determination G13A, for the purposes of this example the yield as at 31 March 1998 for New Zealand Government Stock maturing on 15 March 2002 will be taken as being 7.35% and so the specified rate is 7.35%

• the Units are sold by the Investor on 1 April 2002 for an amount of $6,000.

Taxation consequences of the financial arrangement

For the year ending 31 March 1999:

The coupon interest payment received by the Investor from the Issuer for the year ended 31 March 1999 will be $160. This equates to the initial investment in the Convertible Notes of $8,000 at interest of 2% per annum. This will be gross income.

For the year ending 31 March 2000:

The coupon interest payment received by the Investor from the Issuer for the year ended 31 March 2000 will be $120. This equates to the balance of the investment in the Convertible Notes outstanding of $6,000 at interest of 2% per annum. This will be gross income.

For the year ending 31 March 2001:

The coupon interest payment received by the Investor from the Issuer for the year ended 31 March 2001 will be $80. This equates to the balance of the investment in the Convertible Notes outstanding of $4,000 at interest of 2% per annum. This will be gross income.

For the year ending 31 March 2002:

The coupon payment received by the Investor from the Issuer for the year ended 31 March 2002 will be $40. This equates to the balance of the investment in the Convertible Notes outstanding of $2,000 at interest of 2% per annum. This will be gross income.

The distribution of $1,000 (including withholding tax) received by the Investor from the Unit Trust in respect of the Units held on 31 March 2002 is solely attributable to an excepted financial arrangement. Therefore, it does not have to be considered under the Qualified Accruals Rules, but is gross income as being a dividend.

For the year ending 31 March 2003:

The Investor has not received any further interest on the Convertible Notes as they have been fully repaid and has not received any further distributions on the Units prior to the Units being sold on 1 April 2002.

(a) The 4,000 Units were sold for $6,000. This represents a selling price of $1.50 per Unit. The Gain on the value of the Unit will be the value received of $1.50 per Unit less the original cost of $1.00 per Unit. Therefore, the Gain on a per Unit basis is $0.50. As this is a positive amount, some of the Gain will be attributable to the low rate of interest and will be subject to the Qualified Accruals Rules.

(b) The Interest Advantage per Unit at the end of the fifth year is calculated using the following formula which uses the mathematical convention of using the Greek letter “sigma” to indicate that the formula “I + U” is to be summed for the appropriate number of periods:

Interest Advantage per Unit = (SR - R) / R × Σ (I_t + U_t)

In this case, the formula will become:

Interest Advantage per Unit = ((7.35% - 2%) + 2%) × ((($1,600 + 40,000) + ($1,200 + 40,000) + ($800 + 40,000) + ($400 + 40,000)) / (40,000 + (40,000 + 40,000)))

= 2.675 × $0.10

= $0.2675

(c) As the Gain in the value of the Unit is greater than the Interest Advantage, the maximum amount per Unit subject to the Qualified Accruals Rules will be the amount of the Interest Advantage, being $0.2675. As the Investor holds 4,000 Units, this equates to an amount of $1,070. The further amount of the Gain of $0.2325 per Unit is solely attributable to an excepted financial arrangement and not subject to the Qualified Accruals Rules.

(d) As the Investor is a cash basis holder, there will not have been any amounts previously included as gross income under clause 6 (1) (d) of this Determination so there will not be any amounts to deduct from the amount calculated above of $1,070. This is the amount which will need to be included as gross income.

Example Two

In this example the facts are the same as the first example, but the Investor is not a cash basis holder. It is not necessary to realise the Units in order to consider the accrual treatment for a non-cash basis holder as gross income will have to be returned on a yearly basis.