29 JULY
NEW ZEALAND GAZETTE
2083

Accrued Coupon Interest of A$360 to the date of conversion is paid to Investor A in cash.

The weighted average market price of Parent Co shares for the 5 business days prior to the date of conversion is A$2.63. The conversion price is A$2.50 [i.e. A$2.63 × 0.95 (rounded to the nearest whole cent)]. Investor A is issued with 4000 shares which have a total market value of A$10,520.

The Face Value of the Notes is A$10,000.

In accordance with the method prescribed in the determination, neither the Coupon Interest, the $520 difference between the Face Value of the Notes and the value of the shares, nor the $400 difference between the acquisition price of the Notes and the Face Value of the Notes is attributable to the excepted financial arrangements.

Example 3

Investor B has acquired 2000 Notes on the stock market for A$5.20 for a total consideration of A$10,400. On maturity, Investor B must convert the Notes to shares in Parent Co. NZ Co does not elect to redeem the Notes for cash at maturity.

The weighted average market price of Parent Co shares for the 5 business days prior to the date of conversion is A$2.63. The conversion price is A$2.50. Investor B is issued with 4000 shares which have a total market value of A$10,520.

Accrued Coupon Interest of A$360 to the date of maturity is paid to the Noteholder in cash.

The Face Value of the Notes is A$10,000. Investor B receives A$10,520 worth of shares.

In accordance with the method prescribed in the determination, neither the Coupon Interest, the $520 difference between the Face Value of the Notes and the value of the shares, nor the $400 difference between the Face Value of the Notes and the acquisition price of the Notes is attributable to the excepted financial arrangements.

This determination is signed by me on the 9th day of July 1999.

MARTIN SMITH, General Manager (Adjudication & Rulings).

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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 S13: Investors Subscribing for Convertible Notes in Company and Units in Unit Trust

This determination may be cited as “Determination S13: Investors Subscribing for Convertible Notes in Company and Units in Unit Trust”.

1. Explanation (which does not form part of the determination)

(1) This determination rescinds and replaces Determination S10: Investors Subscribing for Convertible Notes in Company and Units in Unit Trust made by the Commissioner on 18 June 1998. This determination differs from Determination S10 by:

• defining the term “distribution” for the purposes of the determination;
• clarifying the nature of the wider financial arrangement; and
• clarifying the scope of the determination.

(2) This determination applies to holders of Convertible Notes denominated in New Zealand Dollars issued by ABC Limited (“the Issuer”) and Units in the XYZ Unit Trust (“the Unit Trust”).

The arrangement involves Investors subscribing for Convertible Notes issued by the Issuer (which bear interest at the rate of 2% per annum) and Units issued by the Unit Trust. These will be subscribed for on the basis of two Convertible Notes for every Unit subscribed for. The Issuer will lend the proceeds from the issue of the Convertible Notes to the Unit Trust at interest at the rate of 2% per annum. The Unit Trust will use the total funding subscribed by Investors to contribute towards the purchase of a commercial property.

The Unit Trust will repay the loan from the Issuer by way of regular repayments of principal. The Issuer will use the money received from the repayment of the loan to repay the principal amount of the Convertible Notes on issue.

An Investor has the option to convert the Convertible Note into Units in the Unit Trust. The conversion of the Convertible Note extinguishes the Issuer’s liability to repay the principal amount owing to the holder of a Convertible Note.

(3) The form of the investment structure used to issue the Convertible Notes and Units to the Investors involves a number of financial arrangements which together form a “wider” financial arrangement. These financial arrangements include:

(i) the Units in the Unit Trust;

(ii) the Convertible Notes issued by the Issuer;

(iii) the loan of the proceeds received by the Issuer from the issue of the Convertible Notes to the Unit Trust.

The Units and Convertible Notes held by individual Investors constitute wider financial arrangements in their own right, which form part of the overall wider financial arrangement.

(4) These financial arrangements can be analysed in the following way.

(a) The Units in the Unit Trust are deemed to be shares by section HE 1(b) of the Income Tax Act 1994. Section EH 14 of the Act therefore classifies the Units as excepted financial arrangements.

(b) The Convertible Notes have a debt and equity component. The debt component is the loan to the company with repayment being made in cash or units. The equity component is the option to convert repayment to Units in the Unit Trust and is also an excepted financial arrangement under section EH 14.

(5) In relation to the Convertible Notes, the coupon interest payments made by the Issuer to the Investors in respect of the Convertible Notes are below a “market” interest rate, but are nevertheless income or expenditure subject to the Qualified Accruals Rules.

When calculating income or expenditure in relation to the Convertible Notes the repayment in instalments of the principal amount of the Convertible Notes does not constitute income or expenditure subject to the Qualified Accruals Rules.