30 MARCH 2006

NEW ZEALAND GAZETTE, No. 29

775

5. Interpretation
   (1) A reference to “the Act” is a reference to the Income Tax Act 2004.
   (2) “debt securities” means a class of financial arrangements involving an instrument creating or acknowledging a debt that:
   (a) is issued or acquired for its face value (or an amount not materially different from its face value);
   (b) incorporates interest rest periods of no less than one period per income year;
   (c) has an appropriate market rate of interest that is either fixed or floating and applies to the principal outstanding at
   each rest;
   (d) in respect of which fees may be imposed when the instrument is issued, whether those fees are required to be
   spread across the instrument’s term or not; and
   (e) has all amounts payable under the instrument denominated in New Zealand dollars.
   “core acquisition price” means the core acquisition price as defined in section EZ 45 of the Act.
   “fee expenditure” means:
   (a) in relation to a financial arrangement subject to the financial arrangements rules any contingent fee charged to a
   party to the financial arrangement that relates to the financial arrangement; or
   (b) in relation to a financial arrangement subject to the old financial arrangements rules any contingent fee charged to
   a party to the financial arrangement that relates to the financial arrangement plus the smaller of –
   (i) the amount of consideration provided in relation to the financial arrangement by the party to the financial
   arrangement that is not contingent on the implementation of the financial arrangement; or
   (ii) 2% of the core acquisition price of the financial arrangement.
   “fee income” means:
   (a) in relation to a financial arrangement subject to the financial arrangements rules any contingent fee charged by a
   party to a financial arrangement that relates to the financial arrangement; or
   (b) in relation to a financial arrangement subject to the old financial arrangements rules any contingent fee charged by
   a party to the financial arrangement that relates to the financial arrangement plus the smaller of –
   (i) the amount of consideration provided in relation to the financial arrangement to the party to the financial
   arrangement that is not contingent on the implementation of the financial arrangement; or
   (ii) 2% of the core acquisition price of the financial arrangement.
   “financial arrangements rules” means the financial arrangements rules as defined in section EW 1(2) of the Act.
   “IFRS” means the New Zealand equivalent of the International Financial Reporting Standards, operating within the
   framework of Generally Accepted Accounting Principles.
   “interest”, for the purposes of this determination, means any periodic payment or periodic receipt, accrual or
   capitalisation in relation to a debt security to the extent that it is intended to provide a return to the lender on the
   sums provided to the borrower, not including fees or payments effecting a reduction in principal.
   “interest expenditure” means any amount of interest that is incurred by a borrower under a debt security.
   “interest income” means any amount of interest that is derived by a lender under a debt security.
   “old financial arrangements rules” means the old financial arrangements rules as defined in section OB 1 of the Act.
   (3) All other terms used have the same meaning given to them in the Act for the purposes of the financial arrangements
   rules or the old financial arrangements rules, as appropriate.

6. Method
   (1) Interest income or interest expenditure for a debt security will be equal to the interest amount calculated under the
   terms of the debt security on the principal amount outstanding on the debt security during the income year. Non-fee
   income or non-fee expenditure for a financial arrangement that is a finance lease or a hire purchase agreement will be
   calculated in the same way as interest income or expenditure for a debt security by using the interest rate that is
   inherent in the terms of finance lease or hire purchase agreement.
   (2) Fee income and fee expenditure for a debt security or a financial arrangement that is a finance lease or hire purchase
   agreement is to be determined in the same manner as recognised for the purposes of IFRS.

7. Transitional adjustment
   (1) Where a taxpayer changes its spreading method, section EW 26 of the Act requires a spreading method adjustment to
   be calculated under section EW 27 of the Act. This may give rise to an amount of income or expenditure in the year of
   adjustment.
   (2) Where a debt security gives rise to interest income or expenditure only, the results obtained under the previous method
   generally adopted by persons in the business of lending money would be expected to be the same as the result under
   this determination. As a result, the spreading method adjustment should give rise to an amount of income or
   expenditure (where the previous method had been applied) only where, and to the extent, the treatment of fees under
   the previous method was different to the treatment under IFRS.

8. Example
   (1) A bank with a 30 June balance date has made a loan to a customer in accordance with standard banking practice.
   The loan was for $100,000.00 and was issued on 1 July 2005 for a term of 15 years and is secured by way of a
   mortgage over a residential property.