29 NOVEMBER 2012 NEW ZEALAND GAZETTE, No. 142 4163

1. Explanation (which does not form part of the determination)

(1) This determination relates to the transfer of acquired bad debts from New Zealand Company Limited (NZC) to a newly incorporated company, New Zealand Company (2) Limited (NZC-2). NZC and NZC-2 are members of the same consolidated group at the time the acquired bad debts are transferred.

(2) NZC originally acquired for valuable consideration pools of unpaid loans and receivables, which may consist of a few hundred to a few thousand individual debts (ABDs).

(3) NZC can use the profit emerging method of returning income and expenditure pursuant to Special Determination S17: "Utilisation of a profit emerging basis for purchased debt ledgers by a certain New Zealand Company Limited".

(4) This determination also relates to the ability of NZC-2 to utilise a profit emerging basis for returning income and expenditure arising from ABDs that are either transferred from NZC (transferred ABDs) or acquired from a person other than NZC (third-party ABDs).

(5) NZC-2 acquires the ABDs at a deep discount to their face value. NZC-2 subsequently seeks to recover the overdue balances from debtors through various means.

(6) The acquisition of an individual ABD is done on the expectation that its recoveries will be in excess of the purchase price and the cost incurred in attempting collection. Some debts may not achieve any recovery and become uncollectable, and others may be partially collected. The volatility of cash collections may be attributed to such things as the nature of the underlying debt, its age and type, as well as external economic conditions and the effort applied.

(7) NZC-2 will apply NZ IFRS 9 to ABDs for financial reporting purposes.

(8) This determination provides that NZC-2’s contribution to the assessable income and tax liability of the consolidated group for an income year will be based on actual collections reduced by the proportion of purchase cost allocated to that income year.

2. Reference

This determination is made under sections 90AC(1)(bb) and 90AC(1)(j) of the Tax Administration Act 1994.

3. Scope of determination

(1) This determination applies to the tax treatment by NZC of transferred ABDs, which were transferred to a member of the same consolidated group. NZC and the transferee company, NZC-2, were not members of the same consolidated group for the whole of the income year of transfer.

(2) The determination also applies to the tax treatment by NZC-2 of both transferred ABDs and third-party ABDs.

(3) ABDs are pools of unpaid loans and receivables. These pools may consist of a few hundred to a few thousand individual debts.

(4) NZC originally acquired the transferred ABDs at a deep discount to their face value on the expectation that its recoveries would be in excess of the purchase price and the cost incurred in attempting collection. NZC applied the profit emerging basis for the recognition of income and deduction of expenditure on the transferred ABDs pursuant to Special Determination S17: "Utilisation of a profit emerging basis for purchased debt ledgers by a certain New Zealand Company Limited".

(5) NZC-2 will apply NZ IFRS 9 to ABDs for financial reporting purposes.

(6) This determination is made subject to the following conditions:

• NZC-2 is satisfied on the basis of objective criteria that a period of no less than five years and no more than seven years is the appropriate period over which cashflows from a third-party ABD are to be forecast. This period is to be ascertained at the time of purchase of the ABD and must match the accounting spreading period for that ABD; and

• NZC-2 will not take a deduction for the acquisition cost of either a transferred ABD or a third-party ABD (or any part thereof) except as set out in this determination; and

• NZC-2 treats all underlying debts to which it becomes a party on the acquisition of either a transferred ABD or a third-party ABD (which would otherwise be excepted financial arrangements) as financial arrangements under section EW8 of the Income Tax Act 2007.

4. Principle

(1) NZC will recognise all income and expenditure on the ABDs using a profit emerging basis for the part income year prior to forming the consolidated group in its separate return of income under section FM14 of the Income Tax Act and sections 33 and 92 of the Tax Administration Act 1994.

(2) NZC will perform a base price adjustment pursuant to section EW31, as modified by section FM19, when the ABDs are transferred to NZC-2. The consideration for the transfer will be the tax book value of the ABDs on the date of transfer, pursuant to section FM19(2).

(3) All underlying debts to which NZC-2 becomes a party on the acquisition of an ABD are either financial arrangements as defined in section EW3 of the Income Tax Act 2007 or are treated as financial arrangements by NZC-2 under section EW8 of the Income Tax Act 2007.

(4) This determination specifies that income and expenditure from an ABD for an income year is to be recognised by NZC-2 using a profit emerging method. This method takes into account actual cash flows less an apportionment of the cost of purchase.

(5) The apportionment of the purchase cost of a third-party ABD is based on the original forecasted recoveries for the income year as a proportion of the total original forecasted recoveries from the ABD over a period of no less than five years and no more than seven years.

(6) For transferred ABDs, NZC-2 will be allowed a deduction in the income years following the transfer for the amount apportioned to the relevant income year as set out in the original forecast for the ABD by NZC.

(7) Any cash collections on ABDs will be returned as income in the income year in which they are received.