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Special Determination S33 : Application of the financial arrangements rules to the long term incentive plan established for senior executives of New Zealand Company Limited

This determination may be cited as Special Determination S33: "Application of the financial arrangements rules to the long term incentive plan established for senior executives of New Zealand Company Limited"

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

  1. This determination relates to an arrangement (the Plan) establishing a long term incentive plan for senior executives of New Zealand Company Limited (Company).  The following persons are parties to the Plan:
    • Company;
    • Parent Limited (Parent);
    • certain employees of Company (Participants); and
    • Trustee Limited (Trustee).
  1. The Plan comprises four components:
    • A loan from Company to each Participant, paid to Trustee as agent for each Participant (Loan).
    • Acquisition of shares in Parent (Shares) by the Trustee on behalf of each Participant, using the relevant Participant's loaned funds.  The Trustee will do this by either acquiring shares on-market, subscribing for shares in Parent, or transferring shares from its unallocated shareholding for the benefit of each Participant.
    • Trustee will then hold the Shares on trust for each Participant for a restrictive period.  The shares will vest in each Participant upon certain vesting criteria being met.
    • The grant of a put option (Put Option) by Trustee to each Participant in respect of each Participant's beneficial interest in the Shares.  This is in consideration for the grant of a call option (Call Option) by each Participant to Trustee in respect of each Participant's beneficial interest in the Shares.  The options may be exercised where vesting criteria are not met.
    • Payment of a bonus (Bonus) by Company to the Participant, in accordance with the employment contract entered into between Company and the relevant Participant (Employment Contract), where vesting criteria are met.
  1. This determination prescribes:
    • the amount of consideration that is solely attributable to the Shares;
    • the amount of consideration that is solely attributable to the Put Options or Call Options (as relevant); and
    • the amount of consideration that is solely attributable to the Employment Contracts.

2. Reference

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

3. Scope of determination

  1. This determination applies to Company, Trustee and each Participant in respect of the Plan (more fully described in private ruling BR Prv 15/05 issued on 4 February 2015), including the following agreements:
    • letter of invitation from Parent to employees of Company, under which Parent will invite employees to participate in the Plan;
    • Parent long term incentive plan rules (Rules), which set out the terms of the Plan;
    • Parent long term incentive plan trust deed (Trust Deed), under which the Trustee will hold the Shares for the Participants; and
    • Parent long term incentive plan loan agreement (Loan Agreement), under which Company will loan the Participants funds on an interest free basis to enter into the Plan.
  1. This determination is made subject to the following condition:
    • The continued application of private ruling BR Prv 15/05 (under s 91EB of the Tax Administration Act 1994).

4. Principle

  1. The following components of the Plan are excepted financial arrangements:
    • the Shares under s EW 5(13);
    • the Put Options under s EW 5(13);
    • the Call Options under s EW 5(13); and
    • the Employment Contracts under s EW 5(4).
  1. Any amount that is solely attributable to an excepted financial arrangement described in s EW 5(2) to (16) is not an amount that is taken into account under the financial arrangements rules (s EW 6(2)).  This determination specifies the amounts that are solely attributable to the Shares, Put Options, Call Options and Employment Contracts, and are therefore not taken into account under the financial arrangements rules.

5. Interpretation

This determination has no specialised terms that need to be defined further.  All legislative references in this determination are to the Income Tax Act 2007, unless otherwise stated.

6. Method

  1. The following consideration amounts (where relevant) paid in respect of the Shares are solely attributable to the Shares and are not taken into account under the financial arrangements rules:
    • amounts subscribed by the Trustee (as agent for the Participant) for the Shares;
    • amounts paid by the Trustee (as agent for the Participant) to transfer unallocated Shares for the benefit of the Participant;
    • Shares received by the Trustee (as agent for the Participant); and
    • dividends on the Shares received by the Trustee.
  1. The following consideration amounts (where relevant) will be solely attributable to either the Put Options or Call Options and are not taken into account under the financial arrangements rules:
    • the issue of a Call Option by any Participant as consideration for the issue of any Put Option by the Trustee (and vice versa);
    • the transfer of any Participant's beneficial interest in Shares to the Trustee; and
    • the purchase price paid by the Trustee for the transfer of any Participant's beneficial interest in Shares.
  1. The Bonus received by any Participant is solely attributable to the relevant Employment Contract and is not taken into account under the financial arrangements rules.

7. Example

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

This example is based on the following parameters:

Loan $100
Share subscription ($100)
Acquisition of Shares (agreed value) $100
Dividends over restrictive period $36
Dividends applied to partially repay Loan ($36)
Put Option exercised  
  • Transfer of beneficial interest in Shares (agreed value)
($64)
  • Purchase price for beneficial interest in Shares
$64
Loan repayment ($64)

The amounts that are solely attributable to an excepted financial arrangement described in s EW 5(2) to (16) and not taken into account under the financial arrangements rules in accordance with s EW 6(2) are:

  • the Share subscription;
  • the acquisition of Shares;
  • the dividends over the restrictive period;
  • the transfer of beneficial interest in Shares; and
  • the purchase price for beneficial interest in Shares.

The amounts that the Participant must take into account under the financial arrangements rules are:

  • the Loan;
  • the dividends applied to partially repay the Loan; and
  • the Loan repayment.

This Determination is signed by me on the 4th day of February 2015.

 

Howard Davis
Director (Taxpayer Rulings)