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Determinations: Accrual determinations

Special Determination S45: Spreading of income and expenditure under varied intra-group debt arrangements

This Determination may be cited as "Special Determination S45: Spreading of income and expenditure under varied intra-group debt arrangements".

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

  1. This Determination relates to financial arrangements the terms of which have been amended under a Restructured Debt Deed (RDD) entered into by New Zealand Company Limited (NZCo) and the Administration Subsidiaries in favour of Participant Creditors, in accordance with a Deed of Company Arrangement (DOCA).
  2. NZCo and the Administration Subsidiaries owe a significant amount of money to various parties. NZCo and the Administration Subsidiaries have been in financial distress and, immediately prior to the implementation of the restructure, were unable to repay all of their financial obligations.
  3. NZCo and the Administration Subsidiaries entered into a voluntary administration, aimed at providing balance sheet relief and enabling a controlled sale of their assets. This involved NZCo and the Administration Subsidiaries entering into, amongst other things, the DOCA and the RDD. These documents have restructured the liabilities of NZCo and the Administration Subsidiaries and have affected the claims of many of their creditors.
  4. This Determination relates to the Intercompany Obligations, which are owed within the NZCo group of companies.
  5. Prior to the Restructuring Effective Date, certain Intercompany Obligations were owed between Administration Subsidiaries and NZCo. As from the Restructuring Effective Date, the Intercompany Obligations owing immediately prior to that date have become compromised and amended by each applicable Administration Subsidiary to NZCo, or by NZCo to the applicable Administration Subsidiary, in accordance with the RDD and the DOCA.
  6. Prior to the Restructuring Effective Date, NZCo and the Administration Subsidiaries will use the IFRS financial reporting method in s EW 15D to allocate their income and expenditure from their financial arrangements to income years. This requires NZCo and the Administration Subsidiaries to allocate their income and expenditure from their financial arrangements in accordance with their IFRS accounting treatment.
  7. As a consequence of the RDD and DOCA, the IFRS accounting method of NZCo and the Administration Subsidiaries may change from the effective interest rate method to the fair value method.
  8. This Determination sets out a method NZCo and the Administration Subsidiaries may use, as an alternative to the IFRS financial reporting method in s EW 15D, to allocate their income and expenditure from the Intercompany Obligations 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 NZCo and the Administration Subsidiaries in respect of the Intercompany Obligations with the key terms set out below.
  2. Other than the Subsidiary Loan, the Intercompany Obligations are not interest bearing and will continue to be not interest bearing following the Restructuring Effective Date.
  3. The Subsidiary Loan is interest bearing and will remain interest bearing following the Restructuring Effective Date. Interest is payable on the Subsidiary Loan at the rate notified by Subsidiary, being the amount Subsidiary considers, in its reasonable opinion, is required to fund the outstanding balance of the loan. The interest rate is currently set at 5%. Interest is due and payable monthly, but any unpaid interest will be capitalised and form part of the principal.
  4. The liability of NZCo and each Administration Subsidiary in respect of any amounts due to each member of the NZCo Administration Group in respect of its Intercompany Obligations at any time is limited to the aggregate amount available for distribution by NZCo or any Administration Subsidiary, the Security Trustee, or any receiver, liquidator, voluntary administrator or statutory manager (or similar insolvency practitioner) of NZCo and/or an Administration Subsidiary at that time.
  5. The Intercompany Obligations are expressed to be repayable on demand under their original terms. Under the RDD, repayment may only be made to the extent it is necessary to facilitate a payment to third party creditors. The Intercompany Obligations are all denominated in New Zealand dollars.
  6. The Intercompany Obligations will be released and discharged, on and from the Final Distribution Date.
  7. This Determination is made on the conditions that:
    • The Intercompany Obligations do not have any discount, premium, establishment fee or other finance charge.
    • The accounting treatment under IFRS for the Intercompany Obligation of any party applying this Determination changes to the fair value method.
    • Both parties to an Intercompany Obligation use the method in this Determination if the method is available for use by the respective parties.
    • The amendment to the terms of the Intercompany Obligations under the DOCA and the RDD did not result in the cancellation of the Intercompany Obligations.

4. Principle

  1. The Intercompany Obligations (other than the Subsidiary Loan) do not have any interest or discount, premium, establishment fee or other finance charge. Consequently, there is no income or expenditure arising for the parties to these Intercompany Obligations prior to the year in which a base price adjustment is required. Consequently, there is no amount of income or expenditure to allocate to any income year prior to the year in which a base price adjustment is required.
  2. The Subsidiary Loan has a variable interest rate, but no discount, premium, establishment fee or other finance charge. Accordingly, the income or expenditure allocated to an income year (other than an income year in which a base price adjustment is required) in respect of the Subsidiary Loan equals the interest receivable or payable for that income year, provided that the amount of expenditure allocated to an income year of the borrower under this Determination shall not exceed the amount of income allocated to the same income year of the lender (whether under this Determination or otherwise).

5. Interpretation

In this Determination, unless the context otherwise requires:

  • Legislative references are to the Income Tax Act 2007.
  • Capitalised terms not otherwise defined in this Determination have the meanings set out in the RDD and the DOCA. In addition:
    • "Administration Subsidiaries" means the various subsidiaries under administration.     
    • "DOCA" means the Deed of Company Arrangement entered into between NZCo and the Administration Subsidiaries, the Deed Administrators and the Directors of NZCo and the Administration Subsidiaries, following approval by the requisite majority of their 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.
    • "Intercompany Obligations" means any claim that NZCo or the Administration Subsidiaries has against another member of NZCo or the Administration Subsidiaries.
    • "NZCo" mean New Zealand Company Limited (subject to deed of company arrangement).
    • "RDD" means the Restructured Debt Deed entered into between NZCo and the Administration Subsidiaries, 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 Intercompany Obligations became compromised and amended under the RDD and the DOCA.
    • "Subsidiary" means a specified subsidiary.
    • "Subsidiary Loan" means the Intercompany Obligation owed by NZCo to Subsidiary.

6. Method

  1. No income or expenditure will arise for the parties to the Intercompany Obligations, other than the Subsidiary Loan, prior to the income year in which a base price adjustment is required.
  2. For the Subsidiary Loan, the income or expenditure allocated to an income year by a party (other than an income year in which a base price adjustment is required) equals the interest receivable or payable for that income year, provided that the amount of expenditure allocated to an income year of the borrower under this Determination shall not exceed the amount of income allocated to the same income year of the lender (whether under this Determination or otherwise).

7. Example

These examples illustrate the application of the methods set out in this Determination. The examples relate to an income year in which a base price adjustment is not required for the relevant Intercompany Obligation.

Example A

This example applies to an Intercompany Obligation, other than the Subsidiary Loan. The terms of the example Intercompany Obligation are as follows:

  • Principal: $100
    Interest: 0%
    Non Interest Finance costs: nil

There is no amount of income or expenditure to spread under this Determination.

Example B

This example applies to the Subsidiary Loan. The terms of the example Subsidiary Loan are as follows:

  • Principal: $100
    Interest: 5% per year
    Accrued interest per year: $5
    Non Interest Finance costs: nil

NZCo has expenditure of $5 in the income year from the Subsidiary Loan under this Determination. Subsidiary has income of $5 from the Subsidiary Loan in the income year under this Determination.

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

Howard Davis
Director (Taxpayer Rulings)

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