2084

NEW ZEALAND GAZETTE

No. 87

There is no amount attributable to the option to convert the Convertible Notes into Units in the Unit Trust because the conversion from the Convertible Notes into Units in the Unit Trust is made on a market value basis.

(6) The Units in the Unit Trust are not excluded from the application of the Qualified Accruals Rules because they form part of a “wider” financial arrangement. The fact that the proceeds of the issue of the Convertible Notes are lent by the Issuer to the Unit Trust and that the interest payable on this loan is below a “market” interest rate means that any gain on Units is not solely attributable to an excepted financial arrangement.

(7) The gain on Units is, in part, attributable to the low rate of interest that is payable on the loan from the Issuer to the Unit Trust and the correspondingly low rate of interest that is payable on the Convertible Notes. Therefore, part (or possibly all) of any gain on Units will be income for the purposes of the Qualified Accruals Rules.

(8) This Determination prescribes the method to be used by an Investor who subscribes for and holds the Notes and Units to determine how much of the increase of the value of a Unit is solely attributable to an excepted financial arrangement and therefore excluded from the Qualified Accruals Rules as well as the method for spreading the accrual income, gain or loss, or expenditure under the Qualified Accruals Rules.

2. Reference

(1) This determination is made pursuant to sections 90 (1) (c), 90 (1) (g) and 90 (6) of the Tax Administration Act 1994.

(2) Determination S10: Investors Subscribing for Convertible Notes in Company and Units in Unit Trust is rescinded with effect from the day on which this determination is signed.

3. Scope of Determination

(1) The Determination will apply to the Convertible Notes issued by the Issuer and the Units issued by the Trust. Investors will subscribe for these on the basis of two Convertible Notes for one unit subscribed for in the Unit Trust.

(2) The terms of the Convertible Notes are that they will bear interest at a rate of 2% per annum. The Convertible Notes will be convertible at the option of the Investor. The Convertible Notes will convert on a market value and not on the basis of some pre-determined ratio.

(3) The proceeds of the Convertible Note issue made by the Issuer will be lent to the Unit Trust. This loan will be secured by a second mortgage over the properties held by the Unit Trust. The loan made to the Unit Trust of the proceeds from the Convertible Note issue will be made at the rate of 2% interest per annum. The Unit Trust will repay this loan through regular repayments. The Issuer will use these funds to pay the interest on the Convertible Notes, and to repay in regular instalments the principal amount of the Convertible Notes.

(4) Investors may elect to convert their Convertible Notes into Units in the Unit Trust. Once such an election has been made by an Investor it will be irrevocable. On receipt of a Unit in the Unit Trust, the Issuer’s liability under the Convertible Note will be extinguished.

(5) When the Issuer receives a request from an Investor to convert one of the Convertible Notes, the Issuer will elect to convert Units in the Unit Trust and the loan from the Issuer will be reduced by the value of the units issued by the Unit Trust.

(6) The value attributed to the Units when Convertible Notes are converted by the Issuer will be determined by calculating a “unit value” for each unit so converted. The “unit value” shall be determined by dividing the market value of the Unit Trust’s net assets by the number of units currently issued by the Unit Trust.

(7) The effect of this conversion mechanism is intended to be that the balance of the Convertible Notes outstanding with the Issuer will equal the balance of the loan between the Issuer and the Unit Trust. When the Unit Trust makes regular repayments of the loan to the Issuer, the Issuer will use these amounts to redeem or partially redeem the Convertible Notes, and when an Investor wants to convert some of the Convertible Notes into Units in Unit Trust, the liability of the Unit Trust to the Issuer will be discharged by reducing the balance of the loan outstanding. Therefore, regardless of whichever procedure occurs, the amount of the loan between the Issuer and the Unit Trust and the amount of the Convertible Notes outstanding with the Issuer will always be maintained in equilibrium.

(8) This Determination applies to all Investors and prescribes the method for determining the part of the income, gain or loss, or expenditure in respect of the growth in value of the Units that is solely attributable to an excepted 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 Convertible Note issue to the Unit Trust means that any increase in the value of a Unit is not solely attributable to an excepted 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 an excepted 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.