774

NEW ZEALAND GAZETTE, No. 29

30 MARCH 2006

reporting period) on the principal amount of the loan plus relevant fee income, adjusted for doubtful debt provisions. Fee
income was brought to account over a period not exceeding the period of the loan. The recognition of interest and relevant
fee expenditure by the person used the same method. That method was acceptable for reporting income and expenditure for
tax purposes under the financial arrangements rules. Specifically it was an alternative method to the yield to maturity
method that satisfied the requirements of section EW 16 (2) of the Income Act 2004 (“the Act”). The method was
acceptable for the same reasons under the old financial arrangements rules.

Following the adoption of IFRS, the method no longer complies with the requirements of section EW 16 (2) of the Act
because the tax method would not be used by the taxpayer for financial reporting purposes. It also does not comply with
section EW 20 (2) of the Act, in relation to debt securities where yield to maturity cannot apply, for the same reason.

This determination will allow persons in the business of lending money to continue to apply the same tax treatment as
above for interest income and expenditure following their adoption of IFRS.

This determination also sets a method in respect of contingent fees and, in the case of the old financial arrangements rules,
certain non-contingent fees. The recognition of all (contingent and non-contingent) fee income and expenditure by persons
in the business of lending money under IFRS for financial reporting will result in compliance with the requirements of this
determination.

The application of this determination results in any impaired asset adjustments and adjustments to reflect fair value
movement or changes in interest rates, made under IFRS, being disregarded for tax purposes. Bad debt deductions may
continue to be made in accordance with section DB 23 of the Act.

Where a taxpayer changes its spreading method, it is required to make a spreading method adjustment which may give rise
to income or expenditure in the year of adjustment. Where a person that has previously applied the method described above
and then applies this determination, the net effect of the spreading method adjustment should be a one-off recognition, in
the year of adjustment, of any difference in treatment of fees between the previous method and this determination method.

This determination may also be applied to all existing and new finance leases and hire purchase agreements by a person
that receives the rent or hire payments under the lease or hire purchase agreement and where the person has adopted IFRS
for financial reporting purposes.

2. Reference

This determination is made:

(a) For the purposes of the financial arrangements rules, pursuant to section 90AC (1) (e), section 90AC (1) (f) and section
90AC (1) (g) of the Tax Administration Act 1994; and

(b) for the purposes of the old financial arrangements rules, pursuant to section 90 (1) (d) and section 90 (1) (f) of the Tax
Administration Act 1994.

3. Scope

(1) This determination applies to:

(a) A person’s interest income, interest expenditure, fee income and fee expenditure for debt securities held or issued
by the person where the person is in the business of lending money and has adopted IFRS for financial reporting
purposes; and

(b) a person’s income or expenditure from financial arrangements that are finance leases or hire purchase agreements
where:

(i) the lease or agreement is for a fixed term with fixed rent or hire payments made on a regular basis at least
annually;

(ii) the lease or agreement is denominated in New Zealand dollars; and

(iii) the person is the party that receives the rent or hire payments made under those financial arrangements
and the person has adopted IFRS for financial reporting purposes.

(2) This determination does not apply to:

(a) debt securities which have been identified at the time the financial arrangements were acquired and allocated to a
specific portfolio for the purpose of liquidity management, including real time gross settlement; or

(b) debt securities held for the purpose of dealing.

(3) A person may use this determination for all debt securities that satisfy sub-clause (1) (a) (and do not fall within
sub-clause (2)) above irrespective of when the person in the business of lending money became a party to that
debt security. A person may also use this determination for all financial arrangements that satisfy sub-clause (1) (b)
irrespective of when that person became a party to that financial arrangement.

4. Principle

(1) The income deemed to be derived or expenditure deemed to be incurred from a debt security to which this
determination applies:

(a) interest income or interest expenditure will be equal to the interest amount calculated on the principal amount
outstanding on the debt security during the income year; and

(b) fee income and fee expenditure will be recognised for tax purposes in the same manner as they are recognised
under IFRS.

(2) The income deemed to be derived or expenditure deemed to be incurred by a person in respect of a finance lease or
hire purchase agreement to which this determination applies will be calculated in the same way as for a debt security,
under sub-clause 4 (1), using the interest rate that is inherent in the terms of the finance lease or hire purchase
agreement.

(3) For the avoidance of doubt, no impaired asset, fair value movement or interest rate adjustment that may be required by
IFRS is permitted under this determination.