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FE 20: Financial value and regulatory value
or “Explaining how banks calculate financial and regulatory values for reporting”
You could also call this:

“How to work out your bank's net value in New Zealand”

You need to calculate the New Zealand net equity of your New Zealand banking group for an income year. You do this by using a formula: equity value minus adjustments 1 to 11.

Equity value includes things like shareholders’ equity, branch equity, and certain types of loans. There are specific rules about what counts as equity value.

There are 11 adjustments you need to make. These adjustments cover various financial items such as fixed-rate foreign equities, tax debts, intangible assets, and revaluation reserves. Each adjustment has its own set of rules about what should be included or excluded.

Some important points to remember:

  • You need to be careful not to count the same component in multiple adjustments.
  • There are special rules for shares in non-resident companies and interests held by certain persons.
  • You also need to consider notional offshore investments.

If you’re unsure about any part of this calculation, it’s a good idea to ask for help from a tax expert or accountant who understands banking regulations.

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Next up: FE 22: Notional offshore investment

or “Calculating a bank group's overseas investments for tax purposes”
Next

Part F Recharacterisation of certain transactions
Interest apportionment on thin capitalisation: New Zealand banking group

FE 21Banking group’s New Zealand net equity

  1. A reporting bank must calculate the New Zealand net equity of its New Zealand banking group for an income year using the formula—

    equity value − adjustments 1 to 11.

    Where:

    • The items in the formula are defined in subsections (3) to (14).

    • Equity value is the total financial value of—

    • the shareholders’ equity for the group; and
      1. the branch equity relating to fixed establishments of the group; and
        1. any shares issued by a member of the group whose value is not included under paragraph (a) or (b); and
          1. any financial arrangement that is a loan or provision of funds—
            1. that is not taken into account in calculating the group’s funding debt for the tax year corresponding to the income year; and
              1. that is made by a non-resident who is not a member of the New Zealand banking group or associated with a member of the group; and
                1. that is made to a member of the group; and
                  1. that does not give rise to interest expenditure other than as a result of a fluctuation in the value of a currency of a country relative to the value of a currency of another country; and
                    1. whose value is not included under paragraph (a) or (b); and
                      1. that does not relate to a supply of goods or services; and
                      2. an instrument specified by the Governor-General by Order in Council under section FE 24 as included in equity value, but excluding an instrument specified under that section as not being an item of equity value; and
                        1. the same proportion of the financial value of any arrangement not included in paragraphs (a) to (e) as the proportion of the total interest expenditure under the arrangement in the income year that is denied as a deduction in the income year under section FH 3 (Payments under financial instruments producing deduction without income) as an unrecognised amount under section FH 3(2) or under section FH 7 or FH 11 (which provide for the matching of deductions and income from multi-jurisdictional arrangements).

                          1. Adjustment 1 is the financial value of fixed-rate foreign equities or fixed-rate shares that are—

                          2. issued by a member of the group on or after 1 January 2005, or before that date if the measurement period starts on or after 1 January 2010; and
                            1. owned by a person resident in New Zealand; and
                              1. included in equity value under subsection (3).

                                1. Adjustment 1A is the financial value of stapled debt securities that are—

                                2. owned by a person resident in New Zealand; and
                                  1. included in equity value under subsection (3); and
                                    1. stapled to shares other than shares of a company that is a proportional-stapling company.

                                      1. Adjustment 2 is the financial value of a tax debt that is a financial arrangement—

                                      2. included in equity value under subsection (3)(a) to (c); and
                                        1. in relation to which a member of the group is allowed a deduction for the corresponding tax year for interest to which any of sections DB 6 to DB 8 (which relate to interest expenditure) applies.

                                          1. Adjustment 3 is the financial value of unvested policyholder benefit liabilities and policyholder retained profits included in equity value under subsection (3).

                                          2. Adjustment 4 is the financial value of intangible assets, but does not include the value of—

                                          3. the goodwill of a business that is not a banking, financing, leasing, or life insurance business—
                                            1. acquired from a person who, at the time of acquisition, is not associated with a member of the group; or
                                              1. relating to an entity that is acquired from a person who is not associated with a member of the group:
                                              2. a film or film right:
                                                1. property that is depreciable property or is expected to become depreciable property.

                                                  1. Adjustment 5 is the total amount of capital gain arising for the 2004–05 income year or a later income year from a transfer of an intangible asset between a member of the group and a person who is associated with a member of the group.

                                                  2. Adjustment 6 is the financial value of revaluation reserves included in equity value under subsection (3).

                                                  3. Adjustment 7 is the financial value of net future tax benefits included in equity value under subsection (3) that arise from—

                                                  4. a tax loss for the tax year corresponding to the income year referred to in subsection (1):
                                                    1. a loss balance carried forward from an earlier tax year:
                                                      1. a timing or temporary difference to the extent to which the item giving rise to the difference would contribute to the amount of a tax loss for the tax year corresponding to the income year referred to in subsection (1) if allowed as a deduction.

                                                        1. Adjustment 8 is the financial value of a credit enhancement or advance that is, for the purposes of the Capital Adequacy Framework described in section FE 20(2),—

                                                        2. a credit enhancement that a member of the group provides to—
                                                          1. an associated funds management and securitisation scheme of a non-member:
                                                            1. an affiliated insurance group that is a non-member when the credit has not been expensed:
                                                            2. an advance by a member of the group of a capital nature to a connected person who is a non-member.

                                                              1. Adjustment 9 is the financial value of shares in a non-resident company that—

                                                              2. are held by a member or potential member of the group; and
                                                                1. are not interests in a foreign investment fund (FIF) for which the FIF income or FIF loss is calculated using the comparative value method, the deemed rate of return method, the fair dividend rate method, or the cost method; and
                                                                  1. are not shares in a grey list company that—
                                                                    1. are listed on the official list of a recognised exchange; and
                                                                      1. are revenue account property; and
                                                                        1. would not be a sufficient interest in the company if the class of shares were the only class of share issued by the company.

                                                                        2. Adjustment 10 is the financial value of—

                                                                        3. interests included in equity value under subsection (3) held by a person who—
                                                                          1. is not a member of the group because of an exclusion under section FE 35; and
                                                                            1. is resident in New Zealand or holds the interest through a fixed establishment in New Zealand:
                                                                            2. shares in or loans (other than on an arm’s length basis) to a person who is not a member of the group because of an exclusion under section FE 35.

                                                                              1. Adjustment 11 is the amount of notional offshore investment for the group for the income year under section FE 22.

                                                                              2. For the purposes of this section, if a component of an item described in adjustments 1 to 10 is a component of 1 or more other adjustment items, the value of the component is counted once only at its highest value.

                                                                              Compare
                                                                              Notes
                                                                              • Section FE 21(3)(d)(ii): substituted, on (applying for the 2010–11 and later income years), by section 218(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                                              • Section FE 21(3)(e): amended, on , by section 33(1) (and see section 33(3) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                                                                              • Section FE 21(3)(f): inserted, on , by section 33(2) (and see section 33(3) for application) of the Taxation (Neutralising Base Erosion and Profit Shifting) Act 2018 (2018 No 16).
                                                                              • Section FE 21(4): amended (with effect on 30 June 2009), on , by section 218(3) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                                              • Section FE 21(4B) heading: inserted (with effect on 1 April 2008), on , by section 218(4) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                                              • Section FE 21(4B): inserted (with effect on 1 April 2008), on , by section 218(4) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                                              • Section FE 21(7)(a)(i): substituted, on (applying for the 2010–11 and later income years), by section 218(6) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                                              • Section FE 21(7)(a)(ii): substituted, on (applying for the 2010–11 and later income years), by section 218(6) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                                              • Section FE 21(8): substituted, on (applying for the 2010–11 and later income years), by section 218(8) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                                              • Section FE 21(12)(a): replaced (with effect on 1 July 2011 and applying for income years beginning on or after that date), on , by section 59(1) of the Taxation (International Investment and Remedial Matters) Act 2012 (2012 No 34).
                                                                              • Section FE 21 list of defined terms 1973 version provisions: repealed, on , by section 594 of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                                              • Section FE 21 list of defined terms 1988 version provisions: repealed, on , by section 594 of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                                              • Section FE 21 list of defined terms 1990 version provisions: repealed, on , by section 594 of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                                              • Section FE 21 list of defined terms CTR credit: repealed, on , by section 243 of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                                                              • Section FE 21 list of defined terms proportional-stapling company: inserted (with effect on 1 April 2008), on , by section 218(9) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                                              • Section FE 21 list of defined terms stapled: inserted (with effect on 1 April 2008), on , by section 218(9) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                                                              • Section FE 21 list of defined terms stapled debt security: inserted (with effect on 1 April 2008), on , by section 218(9) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).