Treatment of prepayments for services using IFRS

This Determination may be cited as Special Determination S56: Treatment of prepayments for services using IFRS.

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

1. This Determination applies in respect of prepayments received by LP from customers under customer contracts, and of prepayments made by LP to Subsidiaries under supporting contracts on back-to-back terms.
2. Specifically, this Determination relates to the value of the consideration for one of the customer contracts and its supporting contract, and the spreading of any interest income or expenditure for two of the customer contracts and their supporting contracts under the financial arrangements rules.
3. This Determination must be applied in conjunction with BR Prv 17/48.

2. Reference

This Determination is made under ss 90AC(1)(d), 90AC(1)(i) and 90AC(1)(bb) of the Tax Administration Act 1994, in accordance with ss EW 20, EW 32(5) and EW 15I(2)(c) of the Income Tax Act 2007 (respectively).

3. Scope of Determination

1. This Determination applies to LP and its limited partners in respect of payments made and received under Agreements for the Sale and Purchase of services.
2. LP has entered into Customer Contracts and will enter into back-to-back Supporting Contracts with Subsidiaries on materially the same terms.
3. Under each of the Customer Contracts, LP receives upfront pre-payments from the Customers in return for the provision of services over the term of the contracts. Under the back-to-back Supporting Contracts, LP makes upfront payments to Subsidiaries and receives the services (in order to provide those services on to the customers).
4. This Determination is made subject to the following conditions:
   • LP and its limited partners will derive income from the prepayments under the Customer Contracts and will deduct expenditure incurred under the Supporting Contracts under the relevant provisions of the Income Tax Act 2007 (outside of the financial arrangements rules) in accordance with BR Prv 17/48.
   • This Determination applies to:
     • LP, its limited partner, and the ultimate limited partners who are New Zealand tax residents or have a fixed establishment in New Zealand, who use IFRS to prepare financial statements and to report for financial arrangements and who will apply IFRS in respect of the Customer Contracts and Supporting Contracts; and
     • Where relevant, the ultimate limited partners who are New Zealand tax residents or have a fixed establishment in New Zealand, and who do not use IFRS.
   • The application of this Determination is subject to the continued application of private ruling BR Prv 17/48 (the Ruling) issued on 9 October 2017 (including any ruling issued to replace the Ruling, provided that the change to the Ruling does not affect the application of this determination).
   • The Supporting Contracts are entered into on the same material terms as the corresponding Customer Contracts. The Customer Contracts will not be materially different from the documentation provided to Inland Revenue, to the extent that it impacts on the scope of the Determination, or the application of the financial arrangements rules to LP and its limited partners.

4. Principle

1. On and before the Service Date, LP will receive consideration from the Customers (in the form of the prepayments) in return for LP providing consideration to the Customers in the form of the provision of services from the Service Date and over the term of the Customer Contracts.
2. The Customer Contracts are each a “financial arrangement” under s EW 3 and are each an "agreement for the sale and purchase of property or services" under s YA 1.
3. The Customer Contracts are also each a wider or composite "financial arrangement".
4. LP will also make payments to the Subsidiaries under the Supporting Contracts in return for the Subsidiaries providing consideration to LP in the form of the provision of the services from the Service Date and over the term of the Supporting Contracts.
5. The Supporting Contracts are each a "financial arrangement" under s EW 3 and an "agreement for the sale and purchase of property or services" under s YA 1.
6. Valuing the services provided under the Customer Contracts and the Supporting Contracts may result in interest expenditure and interest income to LP and its limited partners.
7. The interest component (if any) will be spread over the term of the contracts.
8. All of the Customer Contracts and the Supporting Contracts will have the same principles under IFRS accounting applied to them in the financial statements of LP and the IFRS limited partners. The non-IFRS ultimate limited partners will be allocated income and expenditure in proportion to their partnership interests and will apply consistent accounting treatment.

5. Interpretation

In this Determination, unless the context otherwise requires:

• All legislative references in this determination are to the Income Tax Act 2007, unless otherwise stated.
• Capitalised terms have the meaning as set out in BR Prv 17/48.
• IFRS means International Financial Reporting Standards as defined in s YA 1.
• IFRS limited partners means LP’s limited partners (including ultimate limited partners) who use IFRS to prepare financial statements and to report for financial arrangements.

6. Method

Category 1 Contract

1. The consideration that is services provided by LP under the Category 1 Contract (and services received by LP under the relevant Supporting Contract) is valued under IFRS using the principles of s EW 32(2B).
2. The amount of LP’s and the IFRS limited partners’ interest expenditure that is to be allocated to each income year under the Category 1 Contract (if any) is determined by using the method in
   s EW 15D IFRS financial reporting method.
3. The amount of LP’s and the IFRS limited partners’ interest income that is to be allocated to each income year under the relevant Supporting Contract (if any) is determined by using the method in s EW 15D IFRS financial reporting method.
4. The non-IFRS limited partners will recognise interest income and expenditure under the Category 1 Contract and the relevant Supporting Contract (if any) as allocated to them from LP, in accordance with the method in s EW 15D.

Category 2 Contract

5. The amount of LP’s and the IFRS limited partners’ interest expenditure that is to be allocated to each income year under the Category 2 Contract (if any) is determined by using the method in
   s EW 15D IFRS financial reporting method.
6. The amount of LP’s and the IFRS limited partners’ interest income that is to be allocated to each income year under the relevant Supporting Contract (if any) is determined by using the method in s EW 15D IFRS financial reporting method.
7. The non-IFRS limited partners will recognise interest income and expenditure under the Category 2 Contract and the relevant Supporting Contract (if any) as allocated to them from LP, in accordance with the method in s EW 15D.

Category 3 Contract

8. The non-IFRS limited partners will recognise interest income and expenditure under the Category 3 Contract and the relevant Supporting Contract (if any) as allocated to them from LP, in accordance with the method in s EW 15D.

7. Example

This example is very stylised and is for illustrative purposes only. The example is based on the anticipated IFRS treatment. However, it is possible that the IFRS treatment may differ from the example, in which case, the IFRS treatment will prevail.

Category 1 Contract

1. The consideration that is services is valued by LP in its financial statements using IFRS, in accordance with the principles of s EW 32(2B) to be $Z.
2. The amount paid by Customer 1 to LP is $X.
3. The amount of LP’s and its limited partners’ interest expenditure (if any) for the Category 1 Contract is $Y (which is $Z-$X).
4. $Y will be deductible to LP’s limited partners over the period of the Category 1 Contract. The proportion of $Y that is to be allocated to each income year under the Category 1 Contract will be calculated in accordance with the IFRS financial reporting method in s EW 15D.
5. For the avoidance of doubt, the method for determining the proportion of $Z which is income that is to be allocated to each income year under Category 1 Contract is set out in BR PRV 17/48.

This Determination is signed by me on the 9th day of October 2017.

Howard Davis
Director (Taxpayer Rulings)