3304

NEW ZEALAND GAZETTE, No. 112

28 SEPTEMBER 2006

(a) The cash redemption amount;
(b) the coupon interest payments, if any; and
(c) any contingent fees.

The income or expenditure for each of the years before the final year of the term must be calculated by reference to the debt component’s value. The calculation must be made using the yield to maturity method or using an alternative method producing results that are not materially different from those that would be produced by the yield to maturity method. The appropriate methods, and their application, are prescribed under the Income Tax Act 2004 (“the Act”).

This determination provides for the following consideration flows for calculating the base price adjustment under the financial arrangements rules:

(a) where the optional convertible note contains a European-style warrant, this determination assumes that the debt component of the consideration paid or received by the issuer or holder on maturity is the face value of the optional convertible note. If the holder elects to be repaid with new shares, any difference between the value of the shares and the optional convertible note’s face value is treated as being attributable to the equity component; and

(b) where the optional convertible note contains an American-style warrant that allows the holder to exercise the warrant component during the optional convertible note’s term, this determination assumes that the debt component of the consideration paid or received by the issuer or holder on the exercise date is the present value of the optional convertible note debt component.

The overall effect of this determination is that the financial arrangements rules treat an optional convertible note as if it were a bond that:

(a) is issued at a price that excludes any amount paid or received for the optional convertible note’s equity component (if any); and

(b) is settled for its face value (or its present value if converted before the end of its term).

This determination replaces Determination G22*. It applies:

(a) from the date of this determination to financial arrangements that a person becomes party to on or after the date of this determination; and

(b) four years after the date of this determination for financial arrangements that were entered into before the date of this determination, and that currently apply Determination G22, satisfy the criteria of this determination and have not matured within that four-year period.

2. Reference

This determination is made under sections 90 (1) (c) and (g), and 90AC (1) (d) and (h) of the Tax Administration Act 1994.

3. Scope

4. This determination replaces Determination G22. It applies in relation to a financial arrangement that is a convertible note which contains either a share warrant that the holder can exercise only on the maturity date or a share warrant that allows the holder to exercise the warrant component during the convertible note’s term:

(a) that a person becomes party to on or after the date of this determination; and

(b) four years after the date of this determination for financial arrangements that were entered into before the date of this determination, and that currently apply Determination G22, satisfy the criteria of this determination and have not matured within that four-year period.

2. This determination applies in relation to a financial arrangement that is a convertible note for which:

(a) all amounts payable under the convertible note are denominated in New Zealand dollars; and

(b) the person has the following information by the person’s first balance date that follows the day on which the person issues or acquires the convertible note:

(i) The cash redemption amount; and

(ii) the maturity date; and

(iii) the amounts and dates of payments to be made under the convertible note by the holder; and

(iv) the dates of payments, other than in repayment, to be made under the convertible note by the issuer; and

(v) the amounts of the payments, other than in repayment, to be made under the convertible note by the company that issues the convertible note or the fixed relationship between the amount of each such payment and a market or indicator interest rate; and

(c) the person holding the convertible note may choose whether consideration in the form of shares or other consideration is to be provided by the company issuing the convertible note in discharge of the liability to make repayment; and

(d) the company that issues the convertible note cannot require the person holding the convertible note to accept consideration in a particular form in discharge of the liability to make repayment; and

(e) the option to accept shares in repayment cannot be separated from the convertible note.

4. Principle

5. An optional convertible note is a financial arrangement with a debt component and an equity component. The equity component, being the share warrant, is an excepted financial arrangement.

6. To apply the financial arrangements rules to a person and an optional convertible note, it is necessary to identify the part of the consideration provided and received by the person under the optional convertible note that is solely attributable to the optional convertible note’s equity component. That part is not included in the calculation under the financial arrangements rules of the income or expenditure arising under the optional convertible note.

7. None of the consideration provided or received by a party under the optional convertible note is attributed to the optional convertible note’s equity component and all consideration paid or received under the optional convertible note is attributed to the debt component if:

(a) The cash redemption amount;

(b) the coupon interest payments, if any; and

(c) any contingent fees.

The income or expenditure for each of the years before the final year of the term must be calculated by reference to the debt component’s value. The calculation must be made using the yield to maturity method or using an alternative method producing results that are not materially different from those that would be produced by the yield to maturity method. The appropriate methods, and their application, are prescribed under the Income Tax Act 2004 (“the Act”).

This determination provides for the following consideration flows for calculating the base price adjustment under the financial arrangements rules:

(a) where the optional convertible note contains a European-style warrant, this determination assumes that the debt component of the consideration paid or received by the issuer or holder on maturity is the face value of the optional convertible note. If the holder elects to be repaid with new shares, any difference between the value of the shares and the optional convertible note’s face value is treated as being attributable to the equity component; and

(b) where the optional convertible note contains an American-style warrant that allows the holder to exercise the warrant component during the optional convertible note’s term, this determination assumes that the debt component of the consideration paid or received by the issuer or holder on the exercise date is the present value of the optional convertible note debt component.

The overall effect of this determination is that the financial arrangements rules treat an optional convertible note as if it were a bond that:

(a) is issued at a price that excludes any amount paid or received for the optional convertible note’s equity component (if any); and

(b) is settled for its face value (or its present value if converted before the end of its term).

This determination replaces Determination G22*. It applies:

(a) from the date of this determination to financial arrangements that a person becomes party to on or after the date of this determination; and

(b) four years after the date of this determination for financial arrangements that were entered into before the date of this determination, and that currently apply Determination G22, satisfy the criteria of this determination and have not matured within that four-year period.

2. Reference

This determination is made under sections 90 (1) (c) and (g), and 90AC (1) (d) and (h) of the Tax Administration Act 1994.

3. Scope

4. This determination replaces Determination G22. It applies in relation to a financial arrangement that is a convertible note which contains either a share warrant that the holder can exercise only on the maturity date or a share warrant that allows the holder to exercise the warrant component during the convertible note’s term:

(a) that a person becomes party to on or after the date of this determination; and

(b) four years after the date of this determination for financial arrangements that were entered into before the date of this determination, and that currently apply Determination G22, satisfy the criteria of this determination and have not matured within that four-year period.

2. This determination applies in relation to a financial arrangement that is a convertible note for which:

(a) all amounts payable under the convertible note are denominated in New Zealand dollars; and

(b) the person has the following information by the person’s first balance date that follows the day on which the person issues or acquires the convertible note:

(i) The cash redemption amount; and

(ii) the maturity date; and

(iii) the amounts and dates of payments to be made under the convertible note by the holder; and

(iv) the dates of payments, other than in repayment, to be made under the convertible note by the issuer; and

(v) the amounts of the payments, other than in repayment, to be made under the convertible note by the company that issues the convertible note or the fixed relationship between the amount of each such payment and a market or indicator interest rate; and

(c) the person holding the convertible note may choose whether consideration in the form of shares or other consideration is to be provided by the company issuing the convertible note in discharge of the liability to make repayment; and

(d) the company that issues the convertible note cannot require the person holding the convertible note to accept consideration in a particular form in discharge of the liability to make repayment; and

(e) the option to accept shares in repayment cannot be separated from the convertible note.

4. Principle

5. An optional convertible note is a financial arrangement with a debt component and an equity component. The equity component, being the share warrant, is an excepted financial arrangement.

6. To apply the financial arrangements rules to a person and an optional convertible note, it is necessary to identify the part of the consideration provided and received by the person under the optional convertible note that is solely attributable to the optional convertible note’s equity component. That part is not included in the calculation under the financial arrangements rules of the income or expenditure arising under the optional convertible note.

7. None of the consideration provided or received by a party under the optional convertible note is attributed to the optional convertible note’s equity component and all consideration paid or received under the optional convertible note is attributed to the debt component if: