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Special Determination S30: Spreading method to be used by a company and growers for a share incentive scheme and valuation of shares issued under the scheme

This determination may be cited as Special Determination S30: "Spreading method to be used by a company and growers for a share incentive scheme and valuation of shares issued under the scheme".

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

  1. This determination relates to a share incentive scheme (the Scheme) established by a company (Company A).
  2. Under the Scheme, eligible growers commit to exclusively supplying all of their produce through a company (Company B) for a three-year period and to appointing Company B as their agent for that period under the terms and conditions of a yearly agency/supply agreement between Company B and growers. Under the agency/supply agreement, the grower authorises Company B to act as the grower's agent in negotiating service arrangements (eg, packaging and cool storage) with Company A (via an annual Services Agreement (SA)) and to supply the grower's produce to marketers. Under the SA, Company A agrees to supply post-harvest services to the grower for which it is paid fees.
  3. In exchange for exclusively committing to supply produce through the Scheme, at the end of each growing season the grower will become entitled to the issue of shares in Company A for no cash consideration. The number of shares issued is based on the number of produce trays supplied by the grower during the supply season.
  4. The Arrangement is the subject of private ruling BR Prv 14/75 issued on 26 November 2014, and is fully described in that ruling.
  5. The Scheme is a financial arrangement under s EW 3 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 SA/supply agreement is a short-term agreement for sale and purchase as defined in s YA 1. The Scheme and the SA/supply agreement are, together, a wider financial arrangement.
  6. Company A has adopted International Financial Reporting Standards (IFRSs) for the purpose of preparing its accounts.

2. Reference

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

3. Scope of determination

  1. This determination applies to a share incentive scheme (the Scheme) for growers, established by a company (Company A).
  2. Under the Scheme, eligible growers commit to exclusively supplying all of their produce for a three year period and to appointing Company B as their agent for that period under the terms and conditions of a yearly agency/supply agreement between Company B and growers. Under the agency/supply agreement, the grower authorises Company B to act as the grower's agent in negotiating service arrangements (eg, packaging and cool storage) with Company A (via an annual Services Agreement (SA)) and to supply the grower's produce to marketers. Under the SA, Company A agrees to supply post-harvest services to the grower for which it is paid fees.
  3. In exchange for exclusively committing to supply produce through the Scheme, at the end of each growing season the grower will become entitled to the issue of shares in Company A for no cash consideration. The number of shares issued is based on the number of produce trays supplied by the grower during the supply season. Growers are allocated the greater of 10 cents worth of new shares for each tray supplied or a minimum holding. The issue price for the shares is based on the volume weighted average sale price of shares on the NZX Main Board over the 20 Business Days prior to 31 August of the applicable year.
  4. This determination applies to determine the spreading method to be used by Company A in respect of the Arrangement.
  5. This determination also applies when:
    • Post-harvest services are provided by Company A to growers to determine the value of the services provided by Company A for the purposes of the financial arrangements rules;
    • Shares are issued by Company A to growers to determine the value of the shares issued by Company A for the purposes of the financial arrangements rules.
  6. This determination is made subject to the following conditions:
    1. Company A will continue to recognise income derived from the SA/supply agreement and deduct expenditure incurred in relation to the SA/supply agreement under the Income Tax Act (primarily Parts C and D) (other than amounts dealt with under this determination).

4. Principle

  1. The Scheme is a financial arrangement under s EW 3 and an agreement for the sale and purchase of property or services as defined in s YA 1. The Scheme and the SA/supply agreement are, together, a financial arrangement as defined in s EW 3.
  2. The SA/supply agreement is an excepted financial arrangement (a short-term agreement for sale and purchase) under s EW 5(22). Under s EW 6(3), all amounts solely attributable to that excepted financial arrangement are taken into account under the financial arrangements rules.
  3. Under s EW 15I, because the financial arrangement includes in part an excepted financial arrangement, s EW 15C(1) does not apply and one of the methods in s EW 15I(2) must be used to allocate an amount of income or expenditure to an income year.
  4. One of the methods available under s EW 15I(2)(c) is a determination made by the Commissioner.
  5. For the purposes of determining the consideration paid or payable under the financial arrangements rules, the value of the post-harvest services provided by Company A and the shares issued by Company A to growers must be established under s EW 32.
  6. Under s EW 32(6), the Commissioner is required to determine the value of the services and shares. Both Company A and growers are required to use this amount.
  7. The only amounts payable under the Arrangement that are required to be spread under the financial arrangements rules are the amounts allocated to the issue of the Company A shares to growers in each year of the Scheme.

5. Interpretation

In this determination (and the Explanation), unless the context otherwise requires-

Words and expressions used (which have not been defined elsewhere within the determination ) have the same meaning as in s YA 1 of the Income Tax Act 2007.

"the Scheme" means Company A’s share incentive scheme.

"SA" means the Services Agreement between Company A and Company B.

"SA/supply agreement" means the SA between Company A and Company B and the agency/supply agreement between Company B and growers.

"IFRS financial reporting standard" means a New Zealand Equivalent International Financial Reporting Standard, in effect under the Financial Reporting Act 2013, and as amended from time to time or an equivalent standard issued in its place.

6. Method

  1. The amounts to be spread in relation to the shares issued by Company A must be allocated to an income year by applying NZ IAS 32 (the method used by Company A for IFRS financial reporting purposes). NZ IAS 32 establishes principles for presenting financial instruments as liabilities or equity and for offsetting financial assets and financial liabilities. For IFRS financial reporting purposes, Company A will recognise the shares when they are issued by discounting Revenue in the P&L for 10 cents per tray for all trays packed in the season for eligible growers and increasing Equity on the Balance Sheet. In the event that a grower is allocated a greater number of shares than under the 10 cents per tray method (to reach a minimum shareholding) the accounts will reflect the actual value of the shares issued and the discount to Revenue.
  2. For the purposes of s EW 32(6), the value of the shares issued by Company A is equal to the issue price determined by reference to the volume weighted average sale price of shares on the NZX Main Board over the 20 Business Days prior to 31 August of the applicable supply season (subject to adjustment by the Board).
  3. For the purposes of s EW 32(6), the value of the post-harvest services provided by Company A is equal to the price paid for the services by growers.

7. Example

This example illustrates the application of the method set out in this determination.

Company A provides a share incentive scheme to growers who commit to using its produce post-harvest services for a three year period. Growers are allocated the greater of 10 cents worth of new shares for each tray supplied or a minimum holding. Company A provides services to growers costing $50 in return for service fees of $100 in a year. At the end of the year, Company A issues shares to growers worth $10, based on the volume weighted average sale price of shares on the NZX Main Board over the 20 Business Days prior to 31 August of the applicable year.

Company A will use NZ IAS 32: Financial instruments to allocate income and expenditure relating to the issue of the shares. This means that, when the shares are issued, Company A will recognise a discount to Revenue in the P&L for 10 cents per tray for all trays packed in the season for eligible growers and an increase to Equity will be recognised in the Balance Sheet.

If a grower is allocated a minimum holding instead of 10 cents worth of new shares per tray, the accounts will reflect the actual value of the shares issued and the corresponding discount to Revenue in the P&L.

The value of the shares for the purposes of s EW 32 is $10.

The value of the services for the purposes of s EW 32 is $100.