2086

NEW ZEALAND GAZETTE

No. 87

• the market value of the Units in the Unit Trust at the end of each of the four income years are as follows:

  31 March	Market Value of Unit
  1999	$1.15
  2000	$1.25
  2001	$1.35
  2002	$1.50

• on 31 March 2002, an income distribution of $0.25 per Unit is paid to Investors by the Unit Trust

• no Investors exercise the option to convert the Convertible Notes

• the “specified rate” is to be determined in accordance with Determination G23 and Determination G13A, based on the term of the loan between the Issuer and the Unit Trust. The term of the loan is from 1 April 1998 to 31 March 2002. Applying Determination G23, the specified rate will be the yield for New Zealand Government Stock of a similar term to the loan determined in accordance with Determination G13A. Under Determination G13A, for the purposes of this example the yield as at 31 March 1998 for New Zealand Government Stock maturing on 15 March 2002 will be taken as being 7.35% and so, the specified rate is 7.35%

• the Units are sold by the Investor on 1 April 2002 for an amount of $6,000.

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.

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.

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.

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.

The distribution of $1,000 (including withholding tax) received by the Investor from the Unit Trust in respect of the Units held on 31 March 2002 is solely attributable to an excepted financial arrangement. Therefore, it does not have to be considered under the Qualified Accruals Rules, but is gross income as being a dividend.

For the year ending 31 March 2003:

The Investor has not received any further interest on the Convertible Notes as they have been fully repaid and has not received any further distributions on the Units prior to the Units being sold on 1 April 2002.

(a) The 4,000 Units were sold for $6,000. This represents a selling price of $1.50 per Unit. The Gain in the value of the Unit will be the value received of $1.50 per Unit less the original cost of $1.00 per Unit. Therefore, the Gain on a per Unit basis is $0.50. As this is a positive amount, some of the Gain will be attributable to the low rate of interest and will be subject to the Qualified Accruals Rules.

(b) The Interest Advantage per Unit at the end of the fifth year is calculated using the following formula which uses the mathematical convention of using the Greek letter “sigma” to indicate that the formula “I + U” is to be summed for the appropriate number of periods:

Interest Advantage per Unit = SR − R / R × Σ(i=1 to 5) (Ii + Ui)

In this case, the formula will become:

Interest Advantage per Unit = ((7.35% − 2%) ÷ 2%) × (($1,600 ÷ 40,000) + ($1,200 ÷ 40,000) + ($800 ÷ 40,000) + ($400 ÷ 40,000) + ($0 ÷ 40,000))
= 2.675 × $0.10
= $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 further amount of the Gain of $0.2325 per Unit is solely attributable to an excepted financial arrangement and not subject to the Qualified Accruals Rules.

(d) As the Investor is a cash basis holder, there will not have been any amounts previously included as gross income under clause 6(1)(d) of this Determination so there will not be any amounts to deduct from the amount calculated above of $1,070. This is the amount which will need to be included as gross income.

Example Two

In this example the facts are the same as for the first example, but the Investor is not a cash basis holder. It is not necessary to realise the Units in order to consider the accrual treatment for a non-cash basis holder as gross income will have to be returned on a yearly basis.

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 / R × Σ(i=1 to 1) (Ii + Ui)

In this case, the formula will become: