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

This determination may be cited as "Determination S14: Issue of perpetual non-cumulative shares by BNZIS, 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 "BNZIS Shares") by BNZ Income Securities Ltd ("BNZIS") to the public and National Equities Limited ("NEL") pursuant to an Investment Statement dated 25 February 2008. That arrangement is the subject of private ruling BR Prv 09/03 and product ruling BR Prd 09/02, issued on 5 February 2009, and is fully described in those rulings.
2. The BNZIS Shares are excepted financial arrangements. The BNZIS Shares form part of a wider financial arrangement including the investment by BNZIS of the proceeds of issue of the BNZIS Shares by way of a loan (the "BNZIM Loan") to BNZ Income Management Ltd ("BNZIM"), and the use of the BNZIM Loan proceeds by BNZIM to subscribe for perpetual preference shares issued by BNZ (the "BNZ Preference Shares"). The BNZIS Shares are also subject to a call option ("Call Option") held by National Australia Bank Ltd ("NAB"). BNZIS has entered into a Deed Poll ("Deed Poll") in favour of the BNZIS Shareholders, which applies if the dividends on the BNZIS Shares are not fully imputed and this results in a loss to a BNZIS Shareholder.
3. This wider financial arrangement has "excepted financial arrangement" components as defined in section EW 5 of the Income Tax Act 2007. The excepted financial arrangements are:
   • the BNZIS Shares
   • the BNZ Preference Shares, and
   • the Call Option.
     
4. The amount of gross income deemed to be derived, or expenditure deemed to be incurred, by a person under the financial arrangement 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 arrangements.
5. This determination prescribes a method to be used for determining the part of the consideration receivable by the parties to the arrangement that is attributable to the excepted financial arrangements.

2. Reference

1. This determination is made pursuant to section 90AC(1)(h) of the Tax Administration Act 1994.

3. Scope of Determination

1. This determination applies specifically to:
   • the BNZIS Shares
   • the BNZ Preference Shares, and
   • the Call Option.

4. Principle

1. The BNZIS Shares, the BNZ Preference Shares, the Call Option and the BNZIM Loan are each part of a wider financial arrangement which has "excepted financial arrangement" components as defined in section EW 5 of the Income Tax Act 2007. The excepted financial arrangements are:
   • the BNZIS Shares
   • the BNZ Preference Shares, and
   • the Call Option.
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 financial arrangement rules.
3. This determination specifies that the amounts that are solely attributable to the excepted financial arrangements are the amounts paid under or with respect to the BNZIS Shares, the BNZ Preference Shares and the Call Option.
4. This determination specifies that no part of (inter alia) the amount advanced or repaid under the BNZIM Loan, or the interest paid on the BNZIM Loan, 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

1. The amounts that are solely attributable to the BNZIS Shares are:
   • the issue price per BNZIS Share of $1
   • the dividends paid on the BNZIS Shares by BNZIS
   • any amount paid by BNZIS under the Deed Poll where BNZIS has not fully imputed the dividends on the BNZIS Shares
   • any other distributions paid on or with respect to the BNZIS Shares by BNZIS, and
   • any amounts paid to acquire the BNZIS Shares, whether pursuant to the Call Option or otherwise.
2. The amounts that are solely attributable to the BNZ Preference Shares are:
   • the issue price per BNZ Preference Share of $1
   • the dividends paid on the BNZ Preference Shares by BNZ
   • any other distributions paid on or with respect to the BNZ Preference Shares by BNZ, and
   • any amounts paid to acquire the BNZ Preference Shares.
3. The amounts that are solely attributable to the Call Option are:
   • the amount paid to acquire the BNZIS Shares under the Call Option, and
   • the value of the BNZIS Shares transferred to a person nominated by NAB pursuant to the Call Option.

7. Example

BNZIS raised $449,730,000 from the issue of the BNZIS Shares on 28 March 2008, and lent the same amount to BNZIM, at an interest rate of 9.89% per annum, payable quarterly on 28 March, June, September and December. Therefore, the amount of interest on the BNZIM Loan for each full quarter is $11,119,574.

BNZIM used the funds to invest in BNZ Preference Shares.

The BNZIS Shares have traded on the NZDX at prices of from $1 to $1.10.

The amounts solely attributable to an excepted financial arrangement are:

• the issue price of the BNZIS Shares
• the dividend paid on the BNZIS Shares
• the consideration paid for the purchase of BNZIS Shares on the NZDX
• the issue price of the BNZ Preference Shares, and
• the dividend paid on the BNZ Preference Shares.

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

• the amount of the BNZIM Loan ($449,730,000)
• the interest paid on the BNZIM Loan ($11,119,574 per quarter)
• the amount paid by BNZIM to BNZIS under the BNZIM Loan as reimbursement for expenses incurred by BNZIS (provided that such expenses are not "non-integral fees", as defined in section YA 1), and
• the amount to be repaid on the repayment of the BNZIM Loan.

This determination is signed by me on the 5th day of February 2009.

Howard Davis
Director (Taxpayer Rulings)