Application of the financial arrangements rules to the sale of shares in Meridian by the Crown

This determination may be cited as Special Determination S24: Application of the financial arrangements rules to the sale of shares in Meridian by the Crown

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

1. This determination relates to an arrangement involving the sale of up to 49% of the ordinary shares (the Shares) in Meridian Energy Limited (Meridian) by the Minister of State Owned Enterprises and the Minister of Finance on behalf of Her Majesty the Queen in Right of New Zealand (the Crown) as vendor to purchasers (IR Holders), pursuant to the terms of the Retail Offer and the Institutional Offer contained in a combined Investment Statement and Prospectus (the Offer Document).
2. For the avoidance of doubt, this Determination does not apply to the Participating Iwi Offer contained in the Offer Document. This determination also does not apply to holders of Instalment Receipts to the extent to which the Shares to which those Instalment Receipts relate are held by an Australian trustee entity.
3. The purchase price will be paid in two instalments (the First Instalment and the Final Instalment). All Shares sold under the Offer Document (other than Shares sold to applicants whose address as recorded in the Instalment Receipt register (Registered Address) is in Australia) will be held in trust by a New Zealand trustee entity until payment of the Final Instalment. Upon payment of the First Instalment, an IR Holder will receive an instalment receipt for each Share acquired under the Offer Document (the Instalment Receipt), which will be evidence of the IR Holder's beneficial interest in that Share.
4. Instalment Receipts will be tradable and are expected to be listed on the New Zealand and Australian stock exchanges. The Final Instalment will be payable by the holder of the Instalment Receipt on the Final Instalment Payment Date (which will be approximately 18 months after the Instalment Receipts are issued).
5. IR Holders will be entitled to receive dividends paid by Meridian on the underlying Shares. If the Final Instalment is not paid on time, penalty interest may be charged.
6. The arrangement is the subject of product ruling BR Prd 13/11 issued on 19 September 2013, and is fully described in that ruling.
7. The arrangement for the sale of the Meridian Shares is a financial arrangement and an "agreement for the sale and purchase of property or services" (as defined in s YA 1 of the Income Tax Act 2007). The Meridian Shares are excepted financial arrangements, as defined in s EW 5(13), and form part of that financial arrangement.
8. An amount that is solely attributable to an excepted financial arrangement described in any of ss EW 5(2) to (16) is not an amount taken into account under the financial arrangements rules. This determination prescribes the method to be used for determining the amount that is solely attributable to the Shares.

2. Reference

This determination is made under ss 90AC(1)(h) of the Tax Administration Act 1994.

3.Scope of determination

This determination applies to the sale of Meridian Shares by the Crown, the sale or purchase of Instalment Receipts by IR Holders on the relevant stock exchange and the acquisition of the Shares by the IR Holders on payment of the Final Instalment.

4. Principle

1. The sale of the Meridian Shares is a financial arrangement and an "agreement for the sale and purchase of property or services" (as defined in s YA 1 of the Income Tax Act 2007). The Meridian Shares are excepted financial arrangements, as defined in s EW 5(13), and form part of that financial arrangement.
2. Any amount that is solely attributable to an excepted financial arrangement described in ss EW 5(2) to (16) is not an amount that is taken into account under the financial arrangements rules (s EW 6(2)).
3. This determination specifies that the amounts that are solely attributable to the Meridian Shares, which are not taken into account under the financial arrangements rules, are:
   1. any dividends paid by Meridian in relation to the underlying Shares; and
   2. any gain or loss made by an IR Holder who buys or sells an Instalment Receipt on the stock exchange or who receives the Shares on payment of the Final Instalment.
4. Any penalty interest charged for late payment of the Final Instalment will not be solely attributable to the Meridian Shares.
5. Due to the amounts set out in (3) being solely attributable to an excepted financial arrangement (the Meridian Shares), no income or expenditure will arise for any IR Holder under the financial arrangements rules (other than an IR Holder who is required to pay penalty interest for the late payment of the Final Instalment). This is because the consideration paid or payable to the IR Holder will equal the consideration paid or payable by the IR Holder.
6. Any gain or loss made by an IR Holder may be subject to other provisions of the Income Tax Act 2007 (outside of the financial arrangements rules). Any IR Holder is required to fulfil their obligations under those other provisions of the Act.

5. Interpretation

This determination has no specialised terms that need to be defined further.

6. Method

1. The amounts that are solely attributable to the Meridian Shares are:
   1. any dividends paid by Meridian in relation to the underlying Shares; and
   2. any gain or loss made by an IR Holder who buys or sells an Instalment Receipt on the stock exchange or who acquires the Shares on payment of the Final Instalment.
2. All other amounts paid or payable under the arrangement, including any penalty interest charged for late payment of the Final Instalment, will not be solely attributable to the Meridian Shares.

7. Examples

These examples illustrate the application of the method set out in this determination. The figures and values used in these examples are indicative only and cannot be relied on as an indication of the expected value of Instalment Receipts or Meridian Shares.

Example A

An IR Holder acquires an Instalment Receipt under the Offer Document for $2.00. The IR Holder sells the Instalment Receipt on the stock market to a third party for $3.20. The IR Holder makes a realised gain from the sale of $1.20. The IR Holder does not receive any dividends in the period that they are holding the Instalment Receipt.

The gain of $1.20 is solely attributable to an excepted financial arrangement (the Meridian Shares) and is not taken into account under the financial arrangements rules.

Example B

A purchaser buys an Instalment Receipt on the stock market for $3.20. The purchaser holds that receipt until the Final Instalment Payment Date, and pays the Final Instalment of $1.80. The purchaser receives the Meridian Shares from the trust, which are valued at $6.00 on the date of receipt. The purchaser therefore has an unrealised gain of $1.00.

The purchaser also receives dividends from Meridian during the period that they hold the Instalment Receipt.

The gain of $1.00 and the dividends received from Meridian are solely attributable to an excepted financial arrangement (the Meridian Shares) and are not taken into account under the financial arrangements rules.

Example C

A purchaser buys an Instalment Receipt on the stock market for $3.00. Three months later, the purchaser sells the Instalment Receipt on the stock market for $2.60. The purchaser has a realised loss of $0.40. The purchaser receives a dividend from Meridian during the period that they hold the Instalment Receipt.

The loss of $0.40 and the dividend received from Meridian are solely attributable to an excepted financial arrangement (the Meridian Shares) and are not taken into account under the financial arrangements rules.

This Determination is signed by me on the 19th day of September 2013.

Howard Davis
Director (Taxpayer Rulings)