Issue of perpetual non-cumulative shares by NZ Co, and related transactions

This determination may be cited as "Determination S18: Issue of perpetual non-cumulative shares by NZ Co, and related transactions".

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

1. This determination relates to an arrangement involving the issue of perpetual non-cumulative shares (the PPS) by a New Zealand company (NZ Co) to its parent company (Parent Co). That arrangement is the subject of private ruling BRPrv11/10 issued on 17 March 2011, and is fully described in that ruling.
2. The PPS are an excepted financial arrangement. The PPS form part of a financial arrangement as contemplated by sEW6(1) of the Income Tax Act 2007 (the wider financial arrangement). The wider financial arrangement also includes a loan from a related party to Parent Co (the Parent Loan), the use of the Parent Loan proceeds by Parent Co to subscribe for the PPS, and the use of dividends received on the PPS, plus payments Parent Co is to receive in terms of the letter dated 23 December 2009 issued by NZ Co to Parent Co (the NZ Co Letter), to pay interest on the Parent Co Loan.
3. This wider financial arrangement has excepted financial arrangement components, as defined in s EW 5 of the Income Tax Act 2007. The PPS are an excepted financial arrangement component of the wider financial arrangement.
4. The amount of income derived or expenditure incurred by a person under the financial arrangement rules in respect of a financial arrangement excludes any amount that is solely attributable to an excepted financial arrangement described in ss EW 5(2) to (16) of the Income Tax Act 2007.
5. This determination prescribes a method to be used for determining the part of the consideration payable and receivable by the parties to the wider financial arrangement that is solely attributable to an excepted financial arrangement.

2. Reference

1. This determination is made under s 90AC(1)(h) of the Tax Administration Act 1994.

3. Scope of determination

1. This determination applies specifically to the PPS.
2. This determination applies if the interest paid on the Parent Co Loan is at an arm's length market rate.

4. Principles

1. The PPS, the Parent Co Loan, and the payment and other obligations under the NZ Co Letter are each part of a wider "financial arrangement" that has excepted financial arrangement components as defined in s EW5 of the Income Tax Act 2007.
2. Any amount that is solely attributable to an excepted financial arrangement described in ss EW 5(2) to (16) of the Income Tax Act 2007 is not included when calculating income or expenditure under the financial arrangements rules.
3. This determination specifies that the only amounts that are solely attributable to the excepted financial arrangement within the wider financial arrangement are the amounts paid under or with respect to the PPS.
4. This determination specifies that no part of (inter alia) the amount advanced or repaid under the Parent Co Loan, the interest paid on the Parent Co Loan, or the payments or other consideration provided in terms of the NZ Co Letter, is solely attributable to an excepted financial arrangement.

5. Interpretation

1. This determination has no specialised terms that need to be defined further.

6. Method

• The amounts that are solely attributable to the PPS are:
• the issue price of the PPS;
• the dividends paid on the PPS;
• any other distributions paid on or with respect to the PPS by NZ Co; and
• any amounts paid to acquire the PPS.

7. Example

NZ Co raised $20,000,000 from the issue of the PPS to Parent Co on 29 December 2009. Parent Co funded its acquisition by a loan of the same amount from a related party, at an interest rate of 9.25% per annum, payable quarterly on 28 March, June, September and December each calendar year. Therefore the amount of interest on the Parent Co Loan for each full quarter is $462,500.

The amounts solely attributable to an excepted financial arrangement are:

• the issue price of the PPS; and
• the dividends paid on the PPS.

The amounts not solely attributable to an excepted financial arrangement are:

• the amount of the Parent Co Loan ($20,000,000);
• the interest paid or capitalised on the Parent Co Loan ($462,500 per quarter, plus the amount of any interest on any capitalised interest);
• the amount outstanding to be repaid on the repayment of the Parent Co Loan; and
• the payments or other consideration provided in terms of the NZ Co Letter.

This determination is signed by me on the 17th day of March 2011.

H W Davis
Director (Taxpayer Rulings)