29 JULY NEW ZEALAND GAZETTE

(c) “Distribution” means any amount distributed by the Unit Trust in respect of the Units issued by the Unit Trust, but does not include:

(i) any amount received by the Investor on the redemption of any Unit in the Unit Trust; or

(ii) any amount received by the Investor on the liquidation of the Unit Trust.

(d) “Investor” means a person who initially subscribes for Convertible Notes issued by the Issuer and Units issued by the Unit Trust and who continues to hold both the Convertible Notes and Units until the Convertible Notes have been fully repaid by the Issuer, and who does not elect to convert their Convertible Notes into Units.

(e) “Qualified Accruals Rules” means the accruals rules, section EH 11, and section FF 2, as that section was before the commencement of the Taxation (Accrual Rules and Other Remedial Matters) Act 1999.

(f) “Units” means the units in the Unit Trust.

(2) For convenience, words and phrases defined in this Determination are indicated by initial capital letters, but the absence of a capital letter shall not alone imply that the word or phrase is used with a meaning different from that given by its definition.

(3) A determination to which this Determination refers may be changed or rescinded by a new determination made by the Commissioner. In such a case, a reference to the old determination is taken to be extended to the new determination.

6. Method

(1) The amount of increase in value of a Unit that is not solely attributable to an excepted financial arrangement, and is therefore subject to the Qualified Accruals Rules, is calculated as follows:

(a) The increase in value of the Unit is the amount by which the market value of the Unit exceeds the cost of the Unit (the “Gain”). If the cost of the Unit is greater than or equal to the market value of the Unit, then there will be no Gain and any difference between the cost and market value will be solely attributable to an excepted financial arrangement. There will be no amount which will be included as gross income under the Qualified Accruals Rules.

(b) Where there is a Gain, part of the Gain will be attributable to the low rate of interest. The amount that is attributable to the low rate of interest (the “Interest Advantage”) is the difference between the specified rate and 2% multiplied by the amount of principal outstanding. However, there may be difficulties in determining the daily balance in cases where part repayment of the principal outstanding occurs during the income year rather than on 31 March. These difficulties may be avoided by using the amount of interest payable during the year divided by 2% as a substitute for the weighted average of the amount of principal outstanding during the income year. The Interest Advantage is therefore calculated using the following formula:

AI = (SR – R) / R × AI; where:

“SR” is the specified rate prescribed by Determination G23: Specified Rate, calculated in accordance with Determination G13A: Prices or Yields based on the term of the loan between the Issuer and the Unit Trust;

“R” is the interest rate of 2% per annum; and

“AI” is the sum of the amounts for each income year since the Convertible Notes and Units were issued calculated in accordance with the formula:

I ÷ U; where:

“I” is the total interest payable by the Unit Trust on the loan from the Issuer to the Unit Trust, for the relevant income year or part year; and

“U” is the number of Units on issue from the Unit Trust at the end of the relevant income year or part year calculated on a weighted average basis to take into account any Units arising from the conversion of Convertible Notes.

(c) Where the Gain is greater than the Interest Advantage, then any amount over and above the Interest Advantage will be solely attributable to the excepted financial arrangement (being the Units) and not subject to the Qualified Accruals Rules. The Interest Advantage will not be solely attributable to an excepted financial arrangement and will be subject to the Qualified Accruals Rules.

Where the Interest Advantage is greater than the Gain, all of the Gain will be subject to the Qualified Accruals Rules.

(d) To determine the amount deemed to be gross income under the Qualified Accruals Rules, an adjustment must be made to the amount subject to the Qualified Accruals Rules under clause 6 (1) (c) of this Determination. The following amount must be subtracted from the amount subject to the Qualified Accruals Rules referred to in clause 6 (1) (c) of this Determination. The amount to be subtracted comprises the total of all amounts previously deemed to be gross income under clause 6 (1) (d) of this Determination less any amounts previously allowed as a deduction under clause 6 (1) (d) of this Determination.

(2) Any interest payment received by an Investor on the Convertible Notes is attributable to the Convertible Notes and is therefore not solely attributable to any excepted financial arrangement. As such, it will be included as gross income under the Qualified Accruals Rules.

(3) Any distribution paid by the Unit Trust to an Investor is solely attributable to an excepted financial arrangement (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)