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Income Tax Act 2007

Timing and quantifying rules - Recognition of accounting treatment

EG 2: Adjustment for changes to accounting practice

You could also call this:

“How your tax is adjusted when you change accounting methods”

When you change how you calculate your income tax, this law explains what happens. It applies when you switch between two methods: cash accounting and accrual accounting.

If you change from cash accounting to accrual accounting, two things happen. First, any money that people owe you on the last day of the year before you change becomes your income in the year you change. Second, any money you owe others on that same day can be deducted from your income in the year you change.

If you change from accrual accounting to cash accounting, it works differently. Any money you owe in the year you change, which you’ve already deducted in past years, becomes your income in the year you change. Also, any money owed to you in the year you change, which you’ve already counted as income in past years, can be deducted in the year you change.

The law defines two terms for you. ‘Accrual accounting method’ means a way of accounting that follows generally accepted accounting practice. ‘Cash accounting method’ means calculating your income tax based on the actual money you receive or pay out.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1514799.

Topics:
Money and consumer rights > Taxes
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“Choose a different date for reporting foreign income and expenses in your New Zealand tax return”

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EG 3: Allocation of income, deductions, and tax credits by portfolio tax rate entity, or

“This section about how portfolio tax rate entities allocate income, deductions, and tax credits has been removed”

Part E Timing and quantifying rules
Recognition of accounting treatment

EG 2Adjustment for changes to accounting practice

  1. This section applies in an income year (the year of change) when a person changes from—

  2. a cash accounting method to an accrual accounting method of calculating their income tax liability; or
    1. an accrual accounting method to a cash accounting method of calculating their income tax liability.

      1. If subsection (1)(a) applies,—

      2. an amount owed to the person on the last day of the income year before the year of change is income of the person in the year of change; and
        1. an amount owed by the person on the last day of the income year before the year of change is allowed as a deduction in the year of change.

          1. If subsection (1)(b) applies,—

          2. an amount equal to the total of all amounts owing by the person in the year of change that have been allowed as a deduction in earlier income years is income of the person in the year of change; and
            1. an amount equal to the total of all amounts owing to the person in the year of change that have been treated as income of the person in earlier income years is allowed as a deduction in the year of change.

              1. In this section,—

                accrual accounting method means a method of accounting that is regarded as accrual accounting under generally accepted accounting practice

                  cash accounting method means a method of accounting by which the income tax liability of a person is calculated by reference to cash receipts or outgoings.

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