29 JULY NEW ZEALAND GAZETTE 2081

obtained by writing to the Assistant General Manager (Adjudication & Rulings), National Office, Inland Revenue, P.O. Box 2198, Wellington.

MARTIN SMITH, General Manager (Adjudication & Rulings).

605467

Regulation 10 of the Income Tax (Determinations) Regulations 1987 requires publication of every determination made by the Commissioner, except where the applicant requires the publication of an anonymous version of the determination instead.

The following is an anonymous version of such a determination made for a particular applicant who is, or intends to be, a party to the relevant financial arrangement. It is not, in itself, the determination nor a determination. Rather it is merely a version of the actual determination made with the applicant’s name and certain other particulars removed.

Determination S12: Issue of NZ Co Converting Notes Denominated in Australian Dollars

This determination may be cited as “Determination S12: Issue of NZ Co Converting Notes Denominated in Australian Dollars”.

1. Explanation

(which does not form part of the determination)

1. This determination relates to converting notes (“the Notes”) issued by NZ Co, a wholly-owned New Zealand subsidiary of Parent Co Limited (“Parent Co”), to the Noteholder to evidence that the Noteholder has provided money to NZ Co.

2. The Notes constitute financial arrangements issued pursuant to a Prospectus dated 26 October 1998 for the Issue of Unsecured Converting Notes by NZ Co to raise A$155 million. Each Note forms part of a wider financial arrangement comprising the Note and agreement to purchase shares in Parent Co, and the subsequent purchase of the shares.

3. Subject to the terms of the Note, the money lent by the Noteholder is to be repayable at a future date in cash. Noteholders have an obligation to purchase shares with the Redemption Proceeds in Parent Co, a company listed on the Australian Stock Exchange, unless NZ Co chooses not to enforce the obligation. If Noteholders are required to purchase shares in Parent Co, the Notes will be redeemed by NZ Co for Face Value and the shares will be issued by Parent Co at a 5 percent discount. If Noteholders are not required to purchase shares with the Redemption Proceeds, the Notes will be redeemed at maturity for Face Value and 5 percent Additional Interest. Prior to Maturity, on the happening of a conversion event, Noteholders can choose to redeem their Notes and purchase shares in Parent Co. Coupon Interest at a fixed rate will be paid in the period between the issue of the Notes and their redemption.

4. Each wider financial arrangement has both a debt component, and equity components which 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.

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 the gross income derived or expenditure incurred in respect of the Notes under the qualified accrual rules.

2. 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.

3. Scope of Determination

1. This determination applies specifically to the Notes issued pursuant to a Prospectus dated 26 October 1998 for the Issue of Converting Notes by NZ Co to raise A$155 million 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 to 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 of 7.535 percent. 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 Issue Price for the Notes will be determined by a formula detailed in clause 2.4 of the Prospectus. The effect of the formula is that the Notes can be issued at either a discount or a premium. However, Retail Investors subscribing for Notes under the prospectus will receive a minimum yield on their Notes of not less than 7.25 percent per annum. The Notes have been issued at their A$5.00 face value per Note.
   (e) The Notes are issued with mandatory “conversion” on maturity (i.e. on 12 June 2003). At various times (on the happening of a conversion event) until maturity, 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.
   (f) The mechanism by which Notes are “converted” is that NZ Co will redeem the Notes in cash and the Noteholder is obliged to use those Redemption Proceeds to acquire shares in Parent Co.
   (g) The Noteholder will receive shares in Parent Co at a 5 percent discount to the weighted average market price for the 5 business days prior to 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