S44
Issued
21 Dec 2015

Spreading of income and expenditure under varied participants' debt arrangements

Determination S44 (21 Dec 2015) relates to the spreading of income and expenditure under varied participants' debt arrangements.

This Determination may be cited as "Special Determination S44: Spreading of income and expenditure under varied participants' debt arrangements".

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

  1. This Determination relates to financial arrangements between New Zealand Company Limited, the other Debtors and Participant Creditors, whose terms have been amended under a Restructured Debt Deed (RDD) in accordance with a Deed of Company Arrangement (DOCA). 
  2. The Debtors owe a significant amount of money to various parties.  The Debtors have been in financial distress and, immediately prior to the implementation of the DOCA and the RDD, were unable to repay all of their financial obligations.
  3. The Debtors entered into a voluntary administration, aimed at providing balance sheet relief and enabling a controlled sale of the Debtors' assets.  This involved the Debtors entering into, amongst other things, the DOCA and the RDD.   These documents have restructured the Debtors' liabilities and have affected the claims of many of the Debtors' creditors, including the Participant Creditors. 
  4. This Determination applies in respect of the Participants' Debts, which are owed to parties outside of the New Zealand Company Limited group of companies.
  5. Each Participant Creditor had amounts owing to it by the Debtors under the terms of existing agreements, being the Participant Creditor Claims.  The amounts include any interest, fees or other amount accrued, but unpaid, under the existing agreements up to, and excluding, the Restructuring Effective Date.
  6. From the Restructuring Effective Date, the Participant Creditor Claims have been compromised, amended and are now owed on common terms in accordance with the RDD and the DOCA. 
  7. Prior to the Restructuring Effective Date, the Debtors will use the IFRS financial reporting method in s EW 15D to allocate their income and expenditure from the Participants' Debts to income years.  This requires the Debtors to allocate their income and expenditure from the Participants' Debts in accordance with their IFRS accounting treatment.
  8. As a consequence of the RDD and DOCA, the Debtors' IFRS accounting method may change from the effective interest rate method to the fair value method.
  9. This Determination sets out a method the Debtors may use as an alternative to the IFRS financial reporting method in s EW 15D to allocate their income and expenditure from the Participants' Debts in and from the income year in which their IFRS accounting method changes, if their IFRS accounting method changes.

2. Reference

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

3. Scope of determination

  1. This Determination applies to the Debtors in respect of the Participants' Debts.  The Participants' Debts have the following key terms.
  2. The Participants' Debts have been apportioned on the basis of one third into Tranche A and two thirds into Tranche B.  The two tranches are not legally separate debts.
  3. The Debtors' liability in respect of any amounts due to the Participant Creditors under the Participants' Debts is limited to the aggregate amount available for distribution by the Debtors (or any receiver, liquidator, voluntary administrator or statutory manager or similar insolvency practitioner) under and in accordance with the relevant Payment Waterfall contained in the RDD.
  4. The rate of interest applicable to Tranche A of a Participants' Debts in any Interest Period shall be the rate per annum (as determined by the Calculation Agent) equal to the sum of the relevant Margin and the Base Rate for the period applicable to the Tranche A amount outstanding from the Restructuring Effective Date.  Each Interest Period is three months.
  5. The rate of interest applicable to Tranche B of a Participants' Debts in any Interest Period shall be 0% per annum for the period applicable to the Tranche B amount outstanding from the Restructuring Effective Date.
  6. Interest shall be calculated on a daily basis at the applicable interest rate and accrued interest shall (subject to the Payment Waterfall and Limited Recourse provisions) be payable monthly on the Tranche A Debt on each Payment Date, on and from a specified date.
  7. The Debtors shall (subject to the Payment Waterfall and Limited Recourse provisions) repay the Participants' Debts, together with all unpaid interest accrued on the Tranche A amount of the Participants' Debts and any other sum due under the RDD, on the first to occur of the Final Distribution Date and the Final Maturity Date.  The Participants' Debts are all denominated in New Zealand dollars.
  8. The Debtors will be released and discharged from all Claims against them by the Participant Creditors on and from the Final Distribution Date.
  9. This Determination may be used by a Debtor for the Participants' Debts on the condition that the Debtor's accounting treatment for the Participants' Debts under IFRS changes from the effective interest rate method to the fair value method.
  10. This Determination does not apply to any of the Participants' Debts that are:
    • a mandatory convertible note;
    • an optional convertible note;
    • an agreement for the sale and purchase of property denominated in foreign currency;
    • treated as an equity instrument under IFRS;
    • treated under IFRS by the relevant Debtor as a hedge; or
    • not a financial arrangement (as defined in s EW 3).
  11. This Determination is made on the condition that:
    • The amendment to the terms of the Participant Creditor Claims under the DOCA and the RDD did not result in the cancellation of those Participant Creditor Claims.

4. Principle

  1. The Debtors may account for income and expenditure on a Participants' Debts using the same method as Method A or Method B (as appropriate) provided for in Determination G26: Variable Rate Financial Arrangements (Determination G26).
  2. For the purposes of applying these methods, the maturity date of the Participants' Debts is deemed to be the Final Maturity Date.  If the actual maturity date changes so that it falls in a different income year to the deemed maturity date, then the maturity date will be treated as extended (or reduced) to the actual maturity date.  An adjustment under Determination G25: Variations in the Terms of a Financial Arrangement (Determination G25) will be required on the actual maturity date, on the basis that the extension or variation is a change in the terms of the Participants' Debts.
  3. Under these methods, the income deemed to be derived or expenditure deemed to be incurred by the Debtors in a Period or an income year is calculated by adding together:
    1. The amount of the Total Finance Charges Excluding Interest allocated to that Period (or income year); and
    2. The amount of Interest payable or receivable in that Period (or income year).
  4. Method A and Method B find and then allocate the Total Finance Charges Excluding Interest to each Period or income year of the financial arrangement.  Once this amount has been allocated, the amount of Interest payable or receivable in that Period or income year is added to it.  This gives the income or expenditure for each Period or income year of the financial arrangement. 
    1. Method A may only be applied to Small Discount or Premium Financial Arrangements.  It results in an allocation to each Period proportionate to the amount of principal outstanding in that Period, and the length of that Period.
    2. Method B may be applied to other financial arrangements.  It assumes that the rate, price or index known to apply in the first Period applies to all subsequent Periods.  The Act and Determinations are used to spread the Total Finance Charges over the term of the financial arrangement.  The assumed Interest content of the Total Finance Charges in each Period (or in each income year) is then subtracted.

The yield to maturity method or other permissible method would be used for calculation purposes.

5. Interpretation

In this Determination, unless the context otherwise requires:

  • Legislative references are to the Income Tax Act 2007 unless otherwise stated.
  • Capitalised terms not otherwise defined in this Determination have the meanings set out in Determination G26, the RDD and the DOCA (as appropriate).  In addition:
    • "Debtors" means the various debtor companies within the New Zealand Company Limited group.     
    • "DOCA" means the Deed of Company Arrangement entered into between the Debtors, the Deed Administrators and the Directors of the Debtors, following approval by the requisite majority of the Debtors' creditors at a Watershed Meeting.
    • "Final Distribution Date" means the date on which the final payment is made to the Participant Creditors in accordance with cl 12.3 of the DOCA.
    • "Final Maturity Date" means the date that is a specified period from the Deed Commencement Date.
    • "IFRS" means the New Zealand equivalents to the International Financial Reporting Standards in effect under the Financial Reporting Act 2013.
    • "Participants' Debts" means the Participant Creditor Claims with the key terms (from the Restructuring Effective Date) specified in the Scope of this Determination.
    • "Participant Creditor" means a creditor under a Participant Creditor Claim.
    • "Participant Creditor Claims" means the various specified creditor claims.
    • "RDD" means the Restructured Debt Deed entered into between the Debtors, the Deed Administrators and the Security Trustee in favour of the Participant Creditors.
    • "Restructuring Effective Date"means the date on which the conditions precedent to the DOCA were satisfied, and is accordingly the date on which the Participant Creditor Claims became compromised, amended and owed on the terms set out in the RDD and the DOCA.

6. Method

  1. The Debtors may use a method that is the same as Method A or Method B, as appropriate, contained in Determination G26 for the Participants' Debts in and from the income year in which their IFRS accounting method changes, if their IFRS accounting method changes.
  2. Method A may only be applied to Small Discount or Premium Financial Arrangements.  Method B may be applied to other financial arrangements.
  3. For the purposes of using these methods, the maturity date of the Participants' Debts is deemed to be two years and six months from the Restructuring Effective Date.
  4. If the actual maturity date occurs in a different income year to the deemed maturity date, the maturity date will be treated as having been extended or varied.  An adjustment under Determination G25 will then be required, on the basis that there will have been an extension or variation in the terms of the financial arrangement. 

7. Example

This example illustrates the application of the methods set out in this Determination from the date the method applies (for an income year other than an income year in which a base price adjustment is performed).  The example is based on a Participant's Debt, as follows:

  • Tranche A portion:  1/3 of $100
    Tranche B portion:  2/3 of $100
    Interest on Tranche A portion:  6% per year
    Accrued interest per year:  $2 (1/3 of $100 at 6%)
    Total Finance Charges Excluding Interest: nil

Because there are no Total Finance Charges Excluding Interest, the Debtor may use Method A.  The Debtor will have expenditure of $2 for the accrued interest that is payable in that income year under Method A.  Because there are no Total Finance Charges Excluding Interest, the Debtor will not be required to spread anything further.  Therefore, the Debtor will not have any other income or expenditure for that income year in respect of either the Tranche A portion or the Tranche B portion.

For further examples, including examples of Method B where there are Total Finance Charges Excluding Interest, see the examples provided in Determination G26.

This Determination is signed by me on the 21st day of December 2015.

Howard Davis
Director (Taxpayer Rulings)