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Income Tax Act 2007

Timing and quantifying rules - Matching rules: revenue account property, prepayments, and deferred payments

EA 3: Prepayments

You could also call this:

“Rules for handling prepaid expenses in income tax”

This section talks about prepayments in your income tax. It applies when you’ve been allowed a deduction for money you’ve spent, but you haven’t used up all of what you paid for by the end of the tax year.

Here’s how it works:

If you’ve paid for goods but haven’t used them all up by the end of the tax year, the unused part is counted as income for that year. You’ll then get a deduction for this amount in the next tax year.

For services, if you’ve paid for them but they haven’t been done by the end of the tax year, that’s also counted as income. You’ll get a deduction for it in the next year.

If you’ve paid for something that gives you rights for a certain time (like a licence), any part that extends past the end of the tax year is treated the same way.

There are some special rules for employee expenses. The tax office assumes these expenses happen in the year the employee is expected to spend the money.

This section doesn’t apply to certain types of spending, like trading stock, livestock, or financial arrangements. These have their own special rules.

If you have aircraft engine parts that you haven’t used yet, they’re treated as part of the cost of overhauling the engine.

The tax office can excuse you from following these rules if they think it’s appropriate.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1514272.

Topics:
Money and consumer rights > Taxes
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“Rules for claiming costs when selling certain types of property for profit”

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EA 4: Deferred payment of employment income, or

“Rules for late payment of employee wages and salaries”

Part E Timing and quantifying rules
Matching rules: revenue account property, prepayments, and deferred payments

EA 3Prepayments

  1. This section applies when—

  2. a person has been allowed a deduction for expenditure under this Act or an earlier Act; and
    1. the expenditure was not incurred on the items described in subsection (2); and
      1. some or all of the expenditure is unexpired under subsections (4) to (7) at the end of the person’s income year.

        1. This section does not apply to expenditure incurred on—

        2. revenue account property to which section EA 2 applies:
          1. trading stock valued under subpart EB (Valuation of trading stock (including dealer’s livestock)):
            1. livestock valued under subpart EC (Valuation of livestock):
              1. an excepted financial arrangement valued under subpart ED (Valuation of excepted financial arrangements):
                1. a leasehold estate, or licence to use land, to which section EI 4B (Consideration for agreement to grant, renew, extend, or transfer leasehold estate or licence) applies:
                  1. a film or a film right to which sections EJ 4 to EJ 8 (which relate to films) apply:
                    1. a specified lease or a lease to which section EJ 10 (Personal property lease payments) applies:
                      1. property that arises as a result of petroleum development expenditure or petroleum exploration expenditure to which sections EJ 12 to EJ 20 (which relate to petroleum mining) apply:
                        1. property that arises as a result of mining development expenditure or mining exploration expenditure to which sections EJ 20B to EJ 20E (which relate to mineral mining) apply:
                          1. a financial arrangement valued under subpart EW (Financial arrangements rules).

                            1. The unexpired portion of a person’s expenditure at the end of an income year—

                            2. is income of the person in the income year under section CH 2 (Adjustment for prepayments); and
                              1. is an amount for which the person is allowed a deduction in the following income year under section DB 50 (Adjustment for prepayments), if subsection (4B) does not apply.

                                1. An amount of expenditure on goods is unexpired at the end of an income year if, by the end of the income year,—

                                2. the person has not used up the goods in deriving income; and
                                  1. the goods are not destroyed or rendered useless for the purpose of deriving income.

                                    1. The unexpired portion of expenditure on pieces that are fitted to an aircraft engine as part of an aircraft engine overhaul is treated as being expenditure incurred in carrying out the aircraft engine overhaul for the purposes of sections DW 5 and DW 6 (which relate to the acquisition, overhaul, and leasing of aircraft engines).

                                    2. An amount of expenditure on services is unexpired at the end of an income year if the services have not been performed by the end of the income year.

                                    3. An amount of expenditure on a chose in action is unexpired at the end of an income year if the amount relates to a period of enforceability of the chose in action falling after the income year.

                                    4. In the case of expenditure subject to sections CW 16B to CW 16F, CW 17, CW 17B, CW 17C, CW 17CB, CW 17CC, and CW 18 (which relate to expenditure, reimbursement, and allowances of employees), this section applies on the basis that the relevant services were performed in the income year in which the employee’s expenditure is expected to occur.

                                    5. The Commissioner may excuse a person from complying with this section under section 91AAC of the Tax Administration Act 1994.

                                    Compare
                                    Notes
                                    • Section EA 3(2)(db): inserted (with effect on 1 April 2013), on , by section 38(1) of the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Act 2013 (2013 No 52).
                                    • Section EA 3(2)(gb): inserted, on , by section 46 of the Taxation (Annual Rates, Foreign Superannuation, and Remedial Matters) Act 2014 (2014 No 4).
                                    • Section EA 3(3)(b): amended, on , by section 55(1) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                    • Section EA 3(4B) heading: inserted, on , by section 55(2) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                    • Section EA 3(4B): inserted, on , by section 55(2) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                    • Section EA 3(7): amended, on , by section 64 of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                    • Section EA 3(7): amended (with effect on 1 April 2008), on , by section 111 of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                    • Section EA 3 list of defined terms aircraft engine: inserted, on , by section 55(3) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                    • Section EA 3 list of defined terms aircraft engine overhaul: inserted, on , by section 55(3) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                                    • Section EA 3 list of defined terms land: inserted (with effect on 1 April 2013), on , by section 38(2) of the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Act 2013 (2013 No 52).
                                    • Section EA 3 list of defined terms leasehold estate: inserted (with effect on 1 April 2013), on , by section 38(2) of the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Act 2013 (2013 No 52).