10 JUNE 2004

NEW ZEALAND GAZETTE, No. 68

1607

(2) The gross income or expenditure from the financial arrangement is the total of an expected component and an unexpected component.

(3) If you must apply this determination to a financial arrangement for the income year in which you enter the financial arrangement, you must measure the expected component as at the time you enter the financial arrangement. You must also recognise the unexpected component when it is realised.

(4) To measure the expected component, you must convert the base currency payments into expected NZD payments on the basis of forward rates at the time you enter the financial arrangement and spread the expected NZD net amount over the term of the financial arrangement.

(5) You must measure the unexpected component as the difference between the actual NZD payments and the expected NZD payments.

(6) If you must apply this determination for the first time to a financial arrangement for an income year that is after the income year in which you enter the financial arrangement, and you have not applied Determination G9B for the financial arrangement, you must measure the expected component as at the end of the income year. You must follow the principle set out above by calculating the expected NZD net amount using actual NZD payments up to the end of the income year in which you first apply the determination and the forward rates at the end of that income year.

(7) Again, you must recognise the unexpected component when it is realised.

Transitional adjustment

(8) For the first income year for which you must use this determination, you must perform the transitional adjustment calculation to calculate gross income or expenditure for all financial arrangements:

(a) that you entered before the income year; and

(b) for which you have not been required to use Determination G9B.

(9) This adjustment ensures that the gross income or expenditure up to the end of the income year in which you first use this determination is equal to that that would have been returned if the actual NZD payments and the forward rates, as described in subparagraph (4), and this determination had been used since you became a party to the financial arrangement.

5. Interpretation—(1) In this determination, a reference to the Act is a reference to the Income Tax Act 1994.

(2) In this determination:

base currency in relation to a financial arrangement means the currency or commodity in which rights and obligations under the financial arrangement are fixed

covered interest parity means the proposition that the differential between forward and spot exchange rates is equal to the interest differentials. That is, the forward rate for a foreign currency exchange at time t for 1 period ahead is equivalent to the spot rate at time t, S_t, multiplied by 1 plus the foreign interest rate, i_f, divided by 1 plus the domestic interest rate, i_d. Forward rates at time t for n periods, Fwd_t,n, can thus be derived based on the principle of covered interest parity as:

Fwd_t,n = S_t × (1 + i_f)^n / (1 + i_d)^n

currency includes any commodity used as a medium of exchange or account, whether in general use or for the purpose of an arrangement

exchange rate means the price of 1 currency expressed in another currency

financial arrangement has the same meaning as in the Act:

Provided that, where a financial arrangement creates obligations in 2 or more currencies or commodities and the consideration to be given and received in respect of the obligations in each of the currencies is separately identifiable, the consideration to be given and received in respect of the obligations in each currency will be treated as relating to separate financial arrangements

floating rate arrangement means a financial arrangement where the interest rate is reset periodically according to a predetermined formula, linking the interest rate to an indicator rate such as the bank bill or interbank rate

forward rate means the exchange rate for a forward contract as defined in Determination G6D: Foreign Currency Rates or the forward exchange rate calculated using the principle of covered interest parity or other methods that are commercially acceptable. In the case where the base currency is a commodity, the forward rate is the future value of the commodity (in NZD)

future value in relation to a commodity and a future date means the value of the commodity at the future date, on a given date, derived from any commercially acceptable, market-based method of valuation

GBP means the currency of the United Kingdom

initial interest rate in relation to a financial arrangement means the interest rate that applies to the first period after the date of issue or acquisition of the financial arrangement

interest means any periodic payment in relation to the financial arrangement, to the extent intended to provide a return to the lender on the sums provided to the borrower. It does not include fees, discounts, premiums, or payments effecting a reduction of principal

NZD means the currency of New Zealand

period means a term commencing immediately after a payment is payable or receivable, and ending when the next payment is payable or receivable

reviewable rate arrangement means a financial arrangement where the interest rate is set periodically in line with market rates

spot rate means the exchange rate for a spot contract as defined in Determination G6D: Foreign Currency Rates or in the case of a commodity, the spot value (in NZD) of the commodity

spot value in relation to a commodity and a day means the value of the commodity on that day derived from any commercially acceptable method of valuation