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Special Determination S53: Application of the financial arrangements rules to a public-private partnership agreement

This determination may be cited as Special Determination S53: Application of the financial arrangments rules to a public-private partnership agreement.

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

  1. This determination relates to an arrangement (the Project) involving the finance, design, construction and on-going provision of operational services in respect of the Facilities by a limited partnership (Contractor LP) under a public-private partnership agreement (the Project Agreement) with the Crown. The sole limited partner in Contractor LP will be Hold LP, holding 100% of Contractor LP.
  2. The limited partners in Hold LP are:
    • a limited partnership (Investment LP) with two limited partners, one of which (Limited Partner A) is a limited liability company and the other of which (Limited Partner B) is itself a limited partnership having multiple limited partners, some of whom are exempt from income tax;
    • a limited liability company (Limited Partner C).
  3. Limited Partner A, Limited Partner C and each limited partner of Limited Partner B that is not exempt from income tax are together referred to as the Taxable Limited Partners. This determination only applies to the Taxable Limited Partners and does not apply to those limited partners that are exempt from income tax.
  4. The Project Agreement comprises three basic components for each Facility:
    • A design and construction phase (the D&C Phase) under which Contractor LP agrees to design and construct the Facility for the Crown in consideration for a fixed lump-sum payment (the D&C Payment), payable on completion of the D&C Phase;
    • A Facility Lease entered into by Contractor LP and the Crown, under which Contractor LP pays an amount representing the rental under the Facility Lease to the Crown (the Rental Prepayment); and
    • An Operating Term (the O&M Phase) under which, in consideration for quarterly payments (the Unitary Charge), Contractor LP will provide operational services to the Crown over a term beginning once the Facility is ready for operation and ending on the Expiry Date (9 December 2043).
  5. The Partnership will enter into:
    • A Construction Agreement with a contractor (the Contractor), under which the Contractor will design and construct each Facility in consideration for monthly and milestone payments; and
    • An Operational Services Sub-Contract (the Operational Services Contract) with a service provider (the Service Provider), under which the Service Provider will provide the on-going operational (and other) services in consideration for quarterly payments.
  6. The Partnership will raise external debt from a range of third party financiers (the Senior Debt).
  7. Investment LP and Limited Partner C will each provide investment support (Sponsor Support) during the D&C Phase in the form of a letter of credit (Letter of Credit) or cash collateral. In addition, regardless of the form of the Sponsor Support, sponsor support fees will be payable by both Contractor LP and Hold LP (the Sponsor Support Fees). Investment LP may procure that its Sponsor Support is provided by its limited partners (Limited Partner A and Limited Partner B), in which case a Sponsor Support Fee will also be payable by Investment LP to Limited Partner A and Limited Partner B.
  8. The Partnership will enter into Interest Rate Swaps in respect of the Senior Debt.
  9. The Facility Lease, O&M Phase of the Project Agreement, Construction Agreement and Operational Services Contract are all excepted financial arrangements. The D&C Phase of the Project Agreement, Senior Debt, Letters of Credit, agreements to pay the Sponsor Support Fees and Interest Rate Swaps are financial arrangements to which Contractor LP is a party. The Project, including all of these agreements, is a wider financial arrangement.
  10. This determination prescribes:
    • the amount of consideration that is solely attributable to each Facility Lease;
    • how the financial arrangements rules apply to the O&M Phase of the Project Agreement, the Construction Agreement and the Operational Services Contract for each Facility; and
    • the method for spreading the payments made under the Senior Debt, Interest Rate Swaps, Letters of Credit and Sponsor Support Fees.

2. Reference

This determination is made under ss 90AC(1)(bb), 90AC(1)(d) and 91AC(1)(h) of the Tax Administration Act 1994.

3. Scope of determination

  1. This determination applies to Contractor LP in respect of the Project (which is set out in detail in Private Ruling BR Prv 17/19, issued on 5 April 2017), including the following arrangements:
    • The D&C Phase of the Project Agreement, under which Contractor LP agrees to design and construct each Facility for the Crown and will receive a fixed lump-sum payment (the D&C Payment) for each Facility once the Facility is ready for operation.
    • The O&M Phase of the Project Agreement, under which Contractor LP will provide on-going operational services to the Crown in consideration for quarterly payments for the period following completion of each Facility until 9 December 2043.
    • The Facility Lease for each Facility, under which Contractor LP will lease the Facility from the Crown for a period following completion of the relevant Facility until 9 December 2043 and will make the Rental Prepayment to the Crown. The Rental Prepayment will be equal to and will offset the D&C Payment.
    • A Construction Agreement with the Contractor, under which the Contractor will design and construct each Facility in consideration for payments under the Construction Agreement.
    • An Operational Services Contract with the Service Provider following completion of each Facility, under which the Service Provider will provide the on-going operational (and other) services in consideration for payments under the Operational Services Contract.
    • Senior Debt, under which Contractor LP will borrow an agreed sum from external lenders for a term of 5 years from financial close of the Project (Financial Close). The Senior Debt will include a capitalising, interest only senior debt facility that converts to an amortising senior tranche on the Conversion Date. It is expected that the Senior Debt will be refinanced within 5 years of Financial Close and every 5 years thereafter over the term of the Project. Under IFRS (as the standards apply at the date of this Determination), the Senior Debt (and any subsequent re-financings) will initially be recognised at fair value plus integral fees, and subsequently measured using the amortised cost using the effective interest method (regardless of whether hedge accounting is applied). The amount of the Senior Debt may be increased by way of an Accordion Facility in order to fund any Additional Schools. The Senior Debt (including the Accordion Facility and any subsequent re-financings) will not be treated as a hedge of another financial arrangement.
    • Interest Rate Swaps, under which Contractor LP will pay a fixed rate of interest to the swap counterparties, and receive a floating rate in return.
    • If Investment LP (or its limited partners) or Limited Partner C provide their sponsor support by way of a Letter of Credit a fee (the LC Fee) will be payable by Investment LP (or its limited partners) or Limited Partner C (respectively) to the provider of the Letter of Credit in consideration for the provider issuing the Letter of Credit in favour of the Hold LP and the Senior Lenders.
    • Regardless of the form of the Sponsor Support, Sponsor Support Fees will be payable by Hold LP to each of Investment LP and Limited Partner C in consideration for the provision of such Sponsor Support (Hold LP Sponsor Support Fees). Contractor LP will in turn be required to pay an amount equal to any Hold LP Sponsor Support Fees to Hold LP (Contractor LP Sponsor Support Fees). If Investment LP procures that Limited Partner A and Limited Partner B provide its Sponsor Support, Investment LP will pay an amount equal to the Hold LP Sponsor Support Fee received by it to each of Limited Partner A and Limited Partner B on a pro rata basis (Investment LP Sponsor Support Fees). (Together, the Hold LP Sponsor Support Fees, Contractor LP Sponsor Support Fees and Investment LP Sponsor Support Fees are the Sponsor Support Fees.
  2. This determination is made subject to the following conditions:
    • Limited Partner A, Limited Partner B and Limited Partner C use IFRSs to prepare financial statements and to report for financial arrangements. Any Taxable Limited Partner that does not use IFRSs to prepare financial statements and to report for financial arrangements will use the same spreading method as Limited Partner B.
    • The Taxable Limited Partners will recognise income derived from the Crown and will deduct expenditure incurred, under the relevant provisions of the Act to the extent that the financial arrangement rules do not apply to these amounts.
    • The continued application of Private Ruling BR Prv 17/19 issued on 5 April 2017 (including any Ruling issued to replace that Ruling, provided that the change to the Ruling does not affect the application of this determination).

4. Principle

  1. Each Facility Lease is an excepted financial arrangement under s EW 5(9). 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)). This determination specifies the amounts that are solely attributable to a Facility Lease that are not taken into account under the financial arrangements rules.
  2. For each Facility, the O&M Phase, Construction Agreements and Operational Service Contracts are “short-term agreements for sale and purchase” as defined in s YA 1, and are excepted financial arrangements under s EW 5(22), provided that payment under the Construction Agreements and Operational Services Contracts is required within 93 days of an invoice being rendered. Any amount that is solely attributable to an excepted financial arrangement described in ss EW 5(17) to (25) that is part of a financial arrangement is an amount that is taken into account under the financial arrangements rules (s EW 6(3)). This determination specifies that no amounts payable to or by Contractor LP in respect of the O&M Phase, Construction Agreements and Operational Services Contracts are required to be spread under the financial arrangements rules.
  3. The D&C Phase for each Facility, Senior Debt, Interest Rate Swaps, Letters of Credit, and agreements by Contractor LP, Hold LP and (if applicable) Investment LP to pay Sponsor Support Fees in consideration for sponsor support are “financial arrangements” under s EW 3. This determination specifies that the payments made to or by the Taxable Limited Partners, in proportion to their share in Hold LP, under the Senior Debt, Letters of Credit, agreement to pay Sponsor Support Fees, and Interest Rate Swaps must be spread under the financial arrangements rules in accordance with this determination.

5. Interpretation

In this determination, unless the context otherwise requires:

  • All legislative references in this determination are to the Income Tax Act 2007, unless otherwise stated.
  • Capitalised terms have the same meaning as set out in the Project Agreement.
  • IFRS means International Financial Reporting Standards as defined in s YA 1.

6. Method

  1. The Rental Prepayment paid in respect of a Facility Lease, and the property interest granted to Contractor LP under a Facility Lease, are solely attributable to the Facility Lease and are not taken into account under the financial arrangements rules.
  2. For each Facility, the Taxable Limited Partners are not required to spread any amounts under the financial arrangements rules in respect of the:
    • O&M Phase of the Project Agreement;
    • Construction Agreement;
    • Operational Services Contract.
  3. The IFRS financial reporting method in s EW 15D may be used to allocate income and expenditure (other than “non-integral fees” as defined in s YA 1) over the term of the Senior Debt and none of the restrictions for application of the IFRS financial reporting method contained in s EW 15D(2B) apply.
  4. The IFRS financial reporting method in s EW 15D may be used to allocate income and expenditure (other than “non-integral fees” as defined in s YA 1) in respect of any subsequent refinancing of the Senior Debt over the term of the relevant refinancing, provided that the terms of any such refinancing are materially similar to the terms of the Senior Debt. This determination paragraph does not affect each Taxable Limited Partner’s obligation to perform a base price adjustment under s EW 31 at the time of each refinancing.
  5. The IFRS financial reporting method in s EW 15D may be used to allocate income and expenditure (other than “non-integral fees” as defined in s YA 1) in respect of additional Senior Debt provided by way of an Accordion Facility over the term of the relevant Accordion Facility, provided that the Accordion Facility is entered into on terms materially similar to the terms of the existing Senior Debt.
  6. None of the mandatory spreading methods in ss EW 15H or EW 15I apply to the Interest Rate Swaps. Over the term of the Interest Rate Swaps, income or expenditure may be allocated using either:
    • the expected value method in s EW 15F (other than for “non-contingent fees” as defined in s YA 1) provided that the swaps are not treated as a hedge of other financial arrangements for which the “fair value method” is used; or
    • the IFRS financial reporting method in s EW 15D (other than for “non-integral fees” as defined in s YA 1) provided that the swaps are not treated as a hedge of other financial arrangements for which a method other than the IFRS financial reporting method is used;
    provided that each Taxable Limited Partner uses the same method for the entire term of the Interest Rate Swaps.
  7. The IFRS financial reporting method in s EW 15D may be used to allocate income and expenditure (other than "non-integral fees" as defined in s YA 1) over the term of the Letters of Credit and the agreements by Contractor LP, Hold LP and (if applicable) Investment LP to pay Sponsor Support Fees in consideration for sponsor support, provided that they are not treated as a hedge of another financial arrangement. None of the restrictions for the application of this reporting method in s EW 15D(2B) apply.
  8. This determination does not affect each Taxable Limited Partner’s obligation to perform base price adjustments under s EW 31 in respect of the Interest Rate Swaps.

7. Example

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

This example is based on the following parameters:

Commencement of D&C Phase 7 April 2017
Completion of D&C Phase 1 February 2019
Completion of AM&M Phase 9 December 2043
D&C Payment from the Crown $1,000
Aggregrate payments to the Contractor ($850)
Facility Lease prepayment ($1,000)
Quarterly payments from the Crown during the O&M Phase $30
Quarterly payments to the Service Provider ($15)
Annual interest on the Senior Debt ($85)
Annual Hold LP Sponsor Support Fee ($15)
Annual Contractor LP Sponsor Support Fee ($15)
Annual LC Fee ($15)
Annual net payments in respect of the Interest Rate Swaps ($7)

The Taxable Limited Partners are not required to spread any amounts under the financial arrangements rules in respect of the Facility Lease, O&M Phase of the Project Agreement, Construction Agreement and O&M Contract.

The amounts that must be spread under the financial arrangement rules are:

  • Interest on the Senior Debt (including the Accordion Facility and any subsequent re-financings) calculated in accordance with the IFRS financial reporting method in s EW 15D;
  • Payments in respect of the Interest Rate Swaps calculated in accordance with the expected value method in s EW 15F or the IFRS financial reporting method in s EW 15D; and
  • Payments made and amounts received in respect of the Letters of Credit and Sponsor Support Fees calculated in accordance with the IFRS financial reporting method in s EW 15D.

This Determination is signed by me on the 5th day of April 2017.

Howard Davis
Director, Taxpayer Rulings