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EA 3: Prepayments
or “Rules for handling prepaid expenses in income tax”
You could also call this:

“Rules for late payment of employee wages and salaries”

This section explains what happens when you haven’t paid your employees by a certain time after the end of the income year. Here’s what you need to know:

If you haven’t paid your employees by 63 days after the end of the income year (or a different time you choose), the unpaid amount becomes income for you in that year. You can then claim it as a deduction in the next year when you pay it.

If you’re paying a shareholder-employee, you have more time to make the payment. You can wait until the last day you could file a tax return if you had asked for the longest possible extension.

If you sell your business, you might be treated as if you’ve paid the employees, even if you haven’t. This happens if:

  • You and the buyer aren’t related
  • You owed the money before selling
  • The employee now works for the buyer
  • You and the buyer agree in writing that the buyer will pay the employee

If you and the buyer are related, or if you transfer the obligation to pay to someone you’re associated with, different rules apply. In these cases, you can’t claim the unpaid amount as income or a deduction in future years.

When a buyer takes on the responsibility to pay employees from a business they’ve bought, they can choose to treat each employee separately or as a group. They must use the same method each year.

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Next up: EB 1: When this subpart applies

or “This subpart applies to businesses with trading stock”
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Part E Timing and quantifying rules
Matching rules: revenue account property, prepayments, and deferred payments

EA 4Deferred payment of employment income

  1. This section applies when—

  2. a person is allowed a deduction in an income year for an amount of expenditure on employment income; and
    1. the person has not paid the amount at the end of—
      1. the 63rd day after the end of the income year; or
        1. the income year, if they choose, in a return of income, to not use paragraph (i) or (ii); or
          1. the period described in subsection (3), for employment income paid to a shareholder-employee.

          2. The unpaid amount is—

          3. income of the person in the income year under section CH 3 (Adjustment for deferred payment of employment income); and
            1. an amount for which the person is allowed a deduction in the following income year under section DB 51 (Adjustment for deferred payment of employment income).

              1. For employment income paid to a shareholder-employee, the 63 day period for payment in subsection (1)(b)(i) is extended until the last date by which the person could file a return of income for the income year if the time for filing were extended to its maximum under section 37(5) of the Tax Administration Act 1994.

              2. For the purposes of this section, a person (the seller) who disposes of a business, or a part of a business, to another person (the buyer) is treated as paying, at the time of the disposal, an amount of employment income of an employee working in the business if—

              3. the seller and the buyer are not associated persons at the time of the disposal; and
                1. the seller has incurred the obligation to pay the amount in the course of their business, whether or not it remains a contingent obligation at the time of the disposal; and
                  1. the employee becomes an employee of the buyer under the disposal arrangements; and
                    1. the seller and the buyer agree in writing, under the disposal arrangements, that—
                      1. the buyer assumes the obligation to pay an amount of employment income to the employee; and
                        1. the consideration payable by the buyer for the business, or the part of the business, reflects the buyer’s assumption of the seller’s provision for the obligation.

                        2. If subsection (4) would have applied but for the fact that the seller and the buyer are associated at the time of the disposal,—

                        3. the amount of employment income is not treated as income of the seller in any income year following the disposal, despite subsection (2)(a) and section CH 3; and
                          1. the seller is denied a deduction for the amount of employment income in any income year following the disposal, despite subsection (2)(b) and section DB 51; and
                            1. the buyer may be allowed a deduction under section DC 10(3) (Disposal of business: transferred employment income obligations).

                              1. If section DC 11 (Transfers of employment income obligations to associates) applies,—

                              2. the amount of employment income is not treated as income of the transferor (person A) in any income year following the disposal, despite subsection (2)(a) and section CH 3; and
                                1. the transferor is denied a deduction for the amount of employment income in any income year following the disposal, despite subsection (2)(b) and section DB 51; and
                                  1. the transferee (person B) may be allowed a deduction under section DC 11.

                                    1. For the purposes of this section, the buyer of a business, or a part of a business, who assumes at the time of the disposal an obligation to pay an amount of employment income—

                                    2. may account for the amount in a way that treats the relevant employee individually or treats the buyer’s employees as a group; and
                                      1. must account for the amount in the same way in each relevant income year.

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                                        Notes
                                        • Section EA 4(1)(b)(ib): inserted, on (applying for the 2017–18 and later income years), by section 79(1) of the Taxation (Business Tax, Exchange of Information, and Remedial Matters) Act 2017 (2017 No 3).
                                        • Section EA 4(4) heading: amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                        • Section EA 4(4): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                        • Section EA 4(4)(a): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                        • Section EA 4(4)(b): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                        • Section EA 4(4)(c): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                        • Section EA 4(4)(d): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                        • Section EA 4(5) heading: amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                        • Section EA 4(5): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                        • Section EA 4(5)(a): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                        • Section EA 4(5)(b): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                        • Section EA 4(5)(c): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                        • Section EA 4(6) heading: amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                        • Section EA 4(6)(a): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                        • Section EA 4(6)(b): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                        • Section EA 4(7): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                        • Section EA 4 list of defined terms time of the disposal: inserted (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                        • Section EA 4 list of defined terms time of the sale: repealed (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on , by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).