776 NEW ZEALAND GAZETTE, No. 29 30 MARCH 2006

(2) The interest rate applicable to the loan is based on a floating rate of interest which was initially set at 9.25%. Principal and interest repayments by the customer have been calculated in accordance with the pricing formula of a table mortgage type of financial arrangement with monthly rests. Equal payments of $1,029.19 per month over 180 (15 years x 12 months) months are required in order to fully repay this loan. The monthly instalments are paid on the last day of each month.

(3) An establishment fee of $500.00, amounting to 0.5% of the amount lent, has been charged to the customer. The fee has been netted off against the amount of principal lent to the customer, resulting in a net amount of $99,500.00 paid by the bank to the customer on 1 July 2005.

(4) No fee was paid by the bank to a mortgage broker in order to originate the loan.

(5) The calculation method required under this determination must be made in accordance with clause 6. A separate calculation is required for interest and for fees. Interest income or expenditure must be calculated in accordance with sub-clause 6 (1).

(6) Interest income for the income year is the aggregate of the monthly interest component of the total monthly repayment of $1,029.19. All fees are excluded from this part of the accrual calculation. Interest calculated under the table mortgage calculation formula and the YTM method are therefore identical. In accordance with the standard table mortgage formula, the interest income component for the first month is $770.83. In the second month it would be $768.84. In the third month it would be $766.83 and so on and so forth aggregating to $9,115.12 for the 2006 income year.

(7) Fee income or expenditure must be calculated in accordance with sub-clause 6 (2) and allocated to income years in accordance with its treatment under IFRS.

(8) The bank’s accrual income for the 2006 income year is therefore:

$(9,115.12 + \text{fee income as per IFRS}).

(9) On the basis that the loan is not written off as bad, the bank’s accrual income for the 2007 income year is:

$(8,802.85 + \text{fee income as per IFRS}).

(10) Similarly, the bank’s accrual income for the 2008 income year is:

$(8,460.44 + \text{fee income as per IFRS}).

(11) If the loan were to run for the full 15-year term of the financial arrangement and the interest rate is not changed, total accrual income of $85,755.09 would be returned under the calculation methodology of this determination.

Further examples are provided in the Schedule.

Signed on the 28th day of March 2006.

JIM GORDON, Policy Manager, Inland Revenue Department.

Schedule

Further examples

Example A:

This example has an identical fact pattern to the example given in clause 8, except that the loan was made on 15 July 2005 and the repayments are made on the 15th of each month.

In calculating the interest income for the year ending 30 June 2006, the interest component of the payment due on 15 July 2006 must be apportioned, on a daily basis, between the year ending 30 June 2006 and the subsequent year. This same apportionment must be carried out at the end each year during the term of the loan, with adjustment for last year’s apportionment.

Example B:

This example has an identical fact pattern to the example given in clause 8, except that the bank paid a mortgage broker a fee of $1,000.00 to originate the loan.

This determination requires accrual income and expenditure to be calculated in accordance with clause 6.

The amount of gross income in relation to interest income is $9,115.12 (the same amount as the example given in clause 8) for the 2006 income year.

In relation to making the loan, the bank charged the customer $500.00 in fees and incurred a fee of $1,000.00 from the mortgage broker. The income and expenditure from these fees is to be allocated to income years in accordance with the treatment of the fees under IFRS.

Accrual income for the 2006 income year is therefore $(9,115.12 - \text{net fee expenditure as per IFRS}).

Example C:

This example concerns a cash basis person, on 1 July 2005, placing $500,000.00 on deposit with a bank at a fixed interest rate of 7.25% p.a. paid quarterly, for a term of three years. There were no fees in relation to this transaction.

The deposit is repaid in one bullet payment of $500,000.00 on 1 July 2008, together with the final quarterly interest amount of $9,062.50.

As there are no fees in relation to the deposit, the fixed interest rate of 7.25% p.a. paid quarterly (1.8125% per calendar quarter) by the bank is the same as the YTM rate of 7.25%.

Interest paid by the bank to the customer for the 2006 income year is $38,250.00 ($9,062.50 x 4 quarters) and is gross expenditure.

Accrual expenditure for the 2006 income year is therefore $38,250.00.