NEW ZEALAND GAZETTE

No. 85

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.

The Investor will also need to consider the part of the increase in the value of the Unit which is attributable to the low interest rate paid on the loan by the Issuer to the Unit Trust.

(a) The Gain in the value of the Unit will be the market value of $1.15 less the original cost of $1.00. Therefore, the Gain on a per Unit basis is $0.15.

(b) The Interest Advantage per Unit at the end of the first year is calculated using the following formula:

Interest Advantage per Unit = (SR - R) × (∑ (1 + U) / R)

In this case, the formula will become:

Interest Advantage per Unit = 2.675 × ($1,600 + 40,000) / ($1,200 + 40,000)

= $0.107

(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 $0.107 per Unit. As the Investor holds 4,000 Units, this equates to an amount of $428. The difference between the Gain and the Interest Advantage will be an amount which is solely attributable to an excepted financial arrangement.

(d) The Investor has not previously included as gross income under clause 6 (1)(d) of this Determination any amounts and so there is no amount to be deducted from the amount of $428. This amount will need to be included as gross income.

$428 and so this amount will need to be deducted from the amount of $749. The amount to be included as gross income will be $321.

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.

(a) The Gain in the value of the Unit will be the current market value of $1.25 less the original cost of $1.00. Therefore, the Gain on a per Unit basis is $0.25.

(b) The Interest Advantage per Unit at the end of the second year is calculated using the following formula:

Interest Advantage per Unit = (SR - R) × (∑ (1 + U) / R)

In this case, the formula will become:

Interest Advantage per Unit = 2.675 × (($1,600 + 40,000) + ($1,200 + 40,000)) / ($1,200 + 40,000)

= $0.18725

(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 $0.18725. As the Investor holds 4,000 Units, this equates to an amount of $749. The difference between the Gain and the Interest Advantage will be an amount which is solely attributable to an excepted financial arrangement.

(d) The Investor has previously included as gross income under clause 6 (1)(d) of this Determination amounts of $428 and $321 so these amounts will need to be deducted from the amount of $749. The amount to be included as gross income will be $0.

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.

(a) The Gain in the value of the Unit will be the current market value of $1.35 less the original cost of $1.00. Therefore, the Gain on a per Unit basis is $0.35.

(b) The Interest Advantage per Unit at the end of the second year is calculated using the following formula:

Interest Advantage per Unit = (SR - R) × (∑ (1 + U) / R)

In this case, the formula will become:

Interest Advantage per Unit = 2.675 × (($1,600 + 40,000) + ($1,200 + 40,000) + ($800 + 40,000)) / ($800 + 40,000)

= $0.24075

(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 $0.24075. As the Investor holds 4,000 Units, this equates to an amount of $963. The difference between the Gain and the Interest Advantage will be an amount which is solely attributable to an excepted financial arrangement.

(d) The Investor has previously included as gross income under clause 6 (1)(d) of this Determination amounts of $428 and $321 so these amounts will need to be deducted from the amount of $963. The amount to be included as gross income will be $214.

For the year ending 31 March 2002:

The coupon interest 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.

(a) The Gain in the value of the Unit will be the current market value of $1.50 less the original cost of $1.00. Therefore, the Gain on a per Unit basis is $0.50.

(b) The Interest Advantage per Unit at the end of the second year is calculated using the following formula:

Interest Advantage per Unit = (SR - R) × (∑ (1 + U) / R)

In this case, the formula will become:

Interest Advantage per Unit = 2.675 × (($1,600 + 40,000) + ($1,200 + 40,000) + ($800 + 40,000) + ($400 + 40,000)) / ($400 + 40,000)

= $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 difference between the Gain and the Interest Advantage will be an amount which is solely attributable to an excepted financial arrangement.

(d) The Investor has previously included as gross income...