Regulation 10 of the Income Tax (Determinations) Regulations 1987 requires publication of every determination made by the Commissioner, except where the applicant requires the publication of an anonymous version of the determination instead. The following is an anonymous version of such a determination made for a particular applicant who is, or intends to be, a party to the relevant financial arrangement. It is not, in itself, the determination nor a determination. Rather it is merely a version of the actual determination made with the applicant's name and certain other particulars removed. Determination S12: Issue of NZ Co Converting Notes Denominated in Australian Dollars This determination may be cited as ``Determination S12: Issue of NZ Co Converting Notes Denominated in Australian Dollars''. 1. Explanation (which does not form part of the determination) 1. This determination relates to converting notes (``the Notes'') issued by NZ Co, a wholly-owned New Zealand subsidiary of Parent Co Limited (``Parent Co''), to the Noteholder to evidence that the Noteholder has provided money to NZ Co. 2. The Notes constitute financial arrangements issued pursuant to a Prospectus dated 26 October 1998 for the Issue of Unsecured Converting Notes by NZ Co to raise A$155 million. Each Note forms part of a wider financial arrangement comprising the Note and agreement to purchase shares in Parent Co, and the subsequent purchase of the shares. 3. Subject to the terms of the Note, the money lent by the Noteholder is to be payable at a future date in cash. Noteholders have an obligation to purchase shares with the Redemption Proceeds in Parent Co, a company listed on the Australian Stock Exchange, unless NZ Co chooses not to enforce the obligation. If Noteholders are required to purchase shares in Parent Co, the Notes will be redeemed by NZ Co for Face Value and the shares will be issued by Parent Co at a 5 percent discount. If Noteholders are not required to purchase shares with the Redemption Proceeds, the Notes will be redeemed at maturity for Face Value and 5 percent Additional Interest. Prior to Maturity, on the happening of a conversion event, Noteholders can choose to redeem their Notes and purchase shares in Parent Co. Coupon Interest at a fixed rate will be paid in the period between the issue of the Notes and their redemption. 4. Each wider financial arrangement has both a debt component, and equity components which are ``excepted financial arrangements'' as defined in section OB 1 of the Income Tax Act 1994. The equity components that are excepted financial arrangements are: the option for the Noteholder to acquire shares in Parent Co on the happening of a conversion event prior to Maturity by redeeming the Notes and using the Redemption Proceeds to purchase the shares; and the shares in Parent Co. 5. The amount of gross income deemed to be derived, or expenditure deemed to be incurred, by a person under the qualified accrual rules in respect of a financial arrangement excludes any amount of income, gain or loss, or expenditure that is solely attributable to an excepted financial arrangement. 6. This determination prescribes a method to be used when calculating the gross income derived or expenditure incurred in respect of the Notes under the qualified accrual rules. 2. Reference 1. This determination is made pursuant to section 90 (1) (g) of the Tax Administration Act 1994. 2. Determination G5C does not apply to the Notes as the Notes are not Mandatory Conversion Convertible Notes. Determination G22 does not apply as the Notes are denominated in Australian dollars. 3. Scope of Determination 1. This determination applies specifically to the Notes issued pursuant to a Prospectus dated 26 October 1998 for the Issue of Converting Notes by NZ Co to raise A$155 million where: (a) The Notes will be unsecured but guaranteed by Parent Co. The guarantee is subordinated to the rights of other commercial debtholders, but will rank pari passu with Parent Co's obligations to any other Noteholders the company has. (b) Noteholders do not participate in any dividends or any other distributions made in respect of shares. The Notes carry no voting rights. (c) The Notes carry a fixed coupon (semi-annual) rate of interest of 7.535 percent. The interest rate on the Notes is set on a stand alone basis having regard to the terms of the Notes alone, and without reference to the shares in Parent Co. Pursuant to the guarantee by Parent Co, NZ Co will suspend the Coupon Interest where Parent Co does not declare a dividend for a half-year period. Any suspension of the Coupon Interest is non-cumulative. (d) The Issue Price for the Notes will be determined by a formula detailed in clause 2.4 of the Prospectus. The effect of the formula is that the Notes can be issued at either a discount or a premium. However, Retail Investors subscribing for Notes under the prospectus will receive a minimum yield on their Notes of not less than 7.25 percent per annum. The Notes have been issued at their A$5.00 face value per Note. (e) The Notes are issued with mandatory ``conversion'' on maturity (i.e. on 12 June 2003). At various times (on the happening of a conversion event) until maturity, the Noteholder has the option to convert the Note into ordinary shares in Parent Co. NZ Co has the option at maturity to redeem the Notes for cash rather than convert to shares. (f) The mechanism by which Notes are ``converted'' is that NZ Co will redeem the Notes in cash for their Face Value and the Noteholder is obliged to use those Redemption Proceeds to acquire shares in Parent Co. (g) The Noteholder will receive shares in Parent Co at a 5 percent discount to the weighted average market price for the 5 business days prior to the date of conversion (subject to a minimum conversion price of A$0.25 which equals the par value of the shares). The 5 percent discount is in recognition that the Noteholder holds a debt instrument and would likely wish to immediately realise the shares acquired. The various transaction costs associated with share realisation and the risks of downward share price movement on large scale share sales, require that the Noteholder be compensated to ensure the Noteholder is in the same position had it simply received cash equal to the face value of the debt. The 5 percent discount on the market price is to ensure the Noteholder can in essence realise the equivalent of the Face Value of the note on liquidating its position in Parent Co. (h) The Noteholder also has a right to elect to convert the Notes and receive a maximum of 6 months' interest (or ``Termination Fee'') in the event interest is suspended (as outlined in paragraph (c) above). Additional rights of conversion are available in certain circumstances (such as in certain exceptional default events such as Parent Co delisting, issue of a bonus issue by Parent Co, or on an announcement of a takeover). (i) At maturity of the Note, rather than requiring the Noteholders to purchase shares in Parent Co, NZ Co may elect to redeem the Notes at their Face Value plus an amount of Additional Interest equal to 5 percent of the Face Value. Under this cash redemption option, NZ Co will pay the Noteholder and the amount of Additional Interest will be reimbursed to NZ Co by Parent Co or one of its Australian subsidiaries. (j) In the event of a change in control of Parent Co, NZ Co may also elect to redeem the Notes for the Cash Redemption Amount. 4. Principle 1. The Note forms part of a wider financial arrangement which has both a debt component, and equity components that are ``excepted financial arrangements'' as defined in section OB 1 of the Income Tax Act 1994. The equity components that are excepted financial arrangements are: the option for the Noteholder to acquire shares in Parent Co on the happening of a conversion event prior to Maturity by redeeming the Notes and using the Redemption Proceeds to purchase the shares; and the shares in Parent Co. The option that NZ Co has to require the Noteholders to use the Redemption Proceeds to purchase shares in Parent Co does not satisfy the definition of ``excepted financial arrangement'' because it is not an option to buy shares or an option to acquire or to sell or otherwise dispose of shares. 2. Any income, gain or loss, or expenditure that is solely attributable to an excepted financial arrangement is not included when calculating gross income or expenditure under the qualified accrual rules. 3. This determination specifies that no amounts are attributable to the excepted financial arrangements. 5. Interpretation 1. In this determination, the following expressions (which have not been defined elsewhere within the determination) have the following meanings: ``Additional Interest'' means 5 percent of the Face Value of the Note. ``Cash Redemption Amount'' means the cash amount expressed in Australian dollars being the amount which the Noteholder would receive upon the exercise by NZ Co of the right to redeem the Notes in cash, being the Face Value plus Additional Interest but excluding any Coupon Interest. ``Coupon Interest'' means the cash interest amounts paid on a semi-annual basis by NZ Co to the Noteholder. ``Face Value'' means the amount of money provided to NZ Co as evidenced by the Note. ``NZ Co'' means NZ Co, a company incorporated in New Zealand. ``Parent Co'' means Parent Co Limited, a public company listed on a recognised stock exchange. ``Maturity'' means 12 June 2003. ``Note'' means the Converting Notes issued by NZ Co pursuant to a Prospectus dated 26 October 1998 for the Issue of Converting Notes. ``Noteholder'' means a person or persons investing in the Notes. ``Redemption Proceeds'' means the cash amount expressed in Australian dollars, being the amount which the Noteholder receives upon the Notes being redeemed which must then be used to purchase shares in Parent Co. ``Retail Investor'' persons who would not qualify as one of the institutional offerees under the Australian Corporations Regulation 7.12.05. ``Termination Fee'' means the interest payable (up to a maximum of 6 months) where the Noteholders elect to convert the Notes into shares following an interest suspension. 6. Method 1. No part of the following amounts are attributable to the excepted financial arrangements: Where the Noteholder uses the Redemption Amounts to subscribe for Parent Co shares, the amount by which the aggregate market value of the Parent Co shares (expressed in Australian dollars in which the Notes are denominated) is above the Face Value of the Notes held by that Noteholder and redeemed by NZ Co. The Coupon Interest payments. The Additional Interest. The Termination Fee. 7. Examples (Any reference to the redemption amount, value of Parent Co shares, or interest calculation is illustrative only.) Example 1 Investor C has 2000 Notes issued by NZ Co at A$5.00, and on maturity must convert the Notes to shares in Parent Co. NZ Co elects to redeem the Notes for cash at maturity. The weighted average market price of Parent Co shares for the 5 business days prior to the date of conversion is A$2.63. Investor C receives A$10,500 as the Cash Redemption Amount. NZ Co pays the Noteholder A$10,500 Cash Redemption Amount and the accrued Coupon Interest of A$360 to the date of maturity. NZ Co is then reimbursed for A$500 from Parent Co or a related subsidiary (being the amount of Additional Interest). The Face Value of the Notes is A$10,000. In accordance with the method prescribed in the determination, neither the Coupon Interest nor the Additional Interest is attributable to the excepted financial arrangements. Example 2 Investor A has acquired 2000 Notes on the stock market for A$4.80 with a face value of $A5.00 for a total consideration of A$9,600. On 12 June 2001, Investor A elects to convert the Notes to shares in Parent Co. Accrued Coupon Interest of A$360 to the date of conversion is paid to Investor A in cash. The weighted average market price of Parent Co shares for the 5 business days prior to the date of conversion is A$2.63. The conversion price is A$2.50 i.e. A$2.63 0.95 (rounded to the nearest whole cent). Investor A is issued with 4000 shares which have a total market value of A$10,520. The Face Value of the Notes is A$10,000. In accordance with the method prescribed in the determination, neither the Coupon Interest, the $520 difference between the Face Value of the Notes and the value of the shares, nor the $400 difference between the acquisition price of the Notes and the Face Value of the Notes is attributable to the excepted financial arrangements. Example 3 Investor B has acquired 2000 Notes on the stock market for A$5.20 for a total consideration of A$10,400. On maturity, Investor B must convert the Notes to shares in Parent Co. NZ Co does not elect to redeem the Notes for cash at maturity. The weighted average market price of Parent Co shares for the 5 business days prior to the date of conversion is A$2.63. The conversion price is A$2.50. Investor B is issued with 4000 shares which have a total market value of A$10,520. Accrued Coupon Interest of A$360 to the date of maturity is paid to the Noteholder in cash. The Face Value of the Notes is A$10,000. Investor B receives A$10,520 worth of shares. In accordance with the method prescribed in the determination, neither the Coupon Interest, the $520 difference between the Face Value of the Notes and the value of the shares, nor the $400 difference between the Face Value of the Notes and the acquisition price of the Notes is attributable to the excepted financial arrangements. This determination is signed by me on the 9th day of July 1999. MARTIN SMITH, General Manager (Adjudication & Rulings).