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Income Tax Act 2007

Timing and quantifying rules - Financial arrangements rules

EW 26: Change of spreading method

You could also call this:

“Rules for changing how you spread income or expenses from financial arrangements”

You can change your method of spreading income or expenditure from a financial arrangement if certain conditions are met. If you want to change from the straight-line method or market value method to a method that is not for IFRS, you need the Commissioner’s approval. For other changes, you don’t need approval, but you must have a good business reason. Trying to pay less tax or delay paying tax is not a good reason.

When you change your method, you need to use a special formula to adjust your income or expenditure for that year. This adjustment might result in extra income or an expense for you.

There are some situations where different rules apply. For example, if you’re changing from the fair value method and it’s not part of a debt restructure, or if you’re changing from the market value method to an IFRS method, you’ll need to follow different steps.

Good business reasons for changing your method include starting or stopping the use of IFRS for your financial statements, or using an IFRS method for a financial arrangement for the first time.

There’s a special rule that might change how this section works for some changes between different types of spreading methods.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1515288.

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EW 25B: Consistency of use of IFRS method, or

“Keeping the same IFRS method for similar financial arrangements”

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EW 27: Spreading method adjustment formula, or

“How to calculate the difference when changing your income calculation method”

Part E Timing and quantifying rules
Financial arrangements rules

EW 26Change of spreading method

  1. A person may change from the straight-line method or the market value method if they change to a method that is not a method for IFRS under section EW 15B, and the Commissioner has authorised the change and notified the person of the authorisation.

  2. A person may change from any spreading method to any other method if the Commissioner's notification under subsection (1) is not required for the change, and they have a sound commercial reason for the change. The advancement, deferral, or reduction of an income tax liability is not a sound commercial reason.

  3. When a person changes their spreading method under subsection (2),—

  4. they must use the formula in section EW 27 to calculate a spreading method adjustment for the income year in which they change the method; and
    1. their only income or expenditure under the financial arrangement for the income year to which the formula is applied is the spreading method adjustment.

      1. A spreading method adjustment calculated under section EW 27 is,—

      2. if positive, income, under section CC 3 (Financial arrangements), derived by the person in the income year for which the calculation is made:
        1. if negative, expenditure incurred by the person in the income year for which the calculation is made.

          1. Section 22A(2) of the Tax Administration Act 1994 applies to a person to whom subsection (2) applies.

          2. Section EW 29(13) applies, and subsections (3) and (4) do not apply, to a financial arrangement, if the person’s change of spreading method involves a change—

          3. from the fair value method and the financial arrangement is not subject to a creditor workout:
            1. from the market value method to a method for IFRS under section EW 15B.

              1. In this section, sound commercial reason includes—

              2. starting or stopping the use of IFRSs to prepare financial statements at the same time as starting or stopping the use of a method for IFRS under section EW 15B:
                1. starting to use a method for IFRS under section EW 15B for a financial arrangement for the first time.

                  1. Section EZ 52C (Change of spreading method: Determination G22 to Determination G22A) modifies this section.

                  Compare
                  Notes
                  • Section EW 26(1) heading: substituted (with effect on 1 April 2008), on , by section 145(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                  • Section EW 26(1): substituted (with effect on 1 April 2008), on , by section 145(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                  • Section EW 26(1): amended, on , by section 36(1) of the Taxation (Transformation: First Phase Simplification and Other Measures) Act 2016 (2016 No 27).
                  • Section EW 26(2): amended, on , by section 36(2) of the Taxation (Transformation: First Phase Simplification and Other Measures) Act 2016 (2016 No 27).
                  • Section EW 26(2): amended (with effect on 1 April 2008), on , by section 145(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                  • Section EW 26(6) heading: added, on , by section 377(1) of the Taxation (Business Taxation and Remedial Matters) Act 2007 (2007 No 109).
                  • Section EW 26(6): substituted (with effect on 1 April 2008), on , by section 145(3) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                  • Section EW 26(7) heading: added, on , by section 377(1) of the Taxation (Business Taxation and Remedial Matters) Act 2007 (2007 No 109).
                  • Section EW 26(7): added, on , by section 377(1) of the Taxation (Business Taxation and Remedial Matters) Act 2007 (2007 No 109).
                  • Section EW 26(7)(a): substituted (with effect on 1 April 2008), on , by section 145(4) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                  • Section EW 26(8) heading: added, on , by section 39 of the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Act 2010 (2010 No 109).
                  • Section EW 26(8): added, on , by section 39 of the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Act 2010 (2010 No 109).
                  • Section EW 26 list of defined terms creditor workout: inserted (with effect on 1 April 2008), on , by section 145(5) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                  • Section EW 26 list of defined terms fair value method: inserted, on , by section 377(2) of the Taxation (Business Taxation and Remedial Matters) Act 2007 (2007 No 109).
                  • Section EW 26 list of defined terms financial statements: inserted, on , by section 377(2) of the Taxation (Business Taxation and Remedial Matters) Act 2007 (2007 No 109).
                  • Section EW 26 list of defined terms IFRS: inserted, on , by section 377(2) of the Taxation (Business Taxation and Remedial Matters) Act 2007 (2007 No 109).
                  • Section EW 26 list of defined terms notify: inserted, on , by section 36(3) of the Taxation (Transformation: First Phase Simplification and Other Measures) Act 2016 (2016 No 27).
                  • Section EW 26 list of defined terms sound commercial reason: inserted, on , by section 377(2) of the Taxation (Business Taxation and Remedial Matters) Act 2007 (2007 No 109).