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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:

"What to do with leftover money you've paid for something you haven't used yet"

Illustration for Income Tax Act 2007

You have spent money on something and not used it all up by the end of the income year. This section tells you what to do with the leftover money. It does not apply to certain things like trading stock or financial arrangements. You have to work out how much of the money is leftover at the end of the year. If you have not used up goods, they are considered leftover. If services have not been performed, they are also considered leftover. The Commissioner can excuse you from following this section under section 91AAC of the Tax Administration Act 1994. You can find more information about this in the Tax Administration Act 1994 by following the link to https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM353632. The leftover money is considered income for the current year and a deduction for the next year. But this rule does not apply in certain situations, such as when subsection (4B) applies or when the expenditure is subject to certain other sections like section EA 2, subpart EB, or subpart EC. There are special rules for things like aircraft engine overhauls, which are explained in sections DW 5 and DW 6. There are also special rules for employees, which are explained in sections CW 16B to CW 16F, CW 17, CW 17B, CW 17C, CW 17CB, CW 17CC, CW 17D, and CW 18.

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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.

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Part ETiming 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, CW 17D, 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 45 of the Taxation (Annual Rates for 2024–25, Emergency Response, and Remedial Measures) Act 2025 (2025 No 9).
                                    • 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).