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Income Tax Act 2007

Timing and quantifying rules - Financial arrangements rules - Consideration when anti-avoidance provision applies

EW 62: When and how calculation of cash basis adjustment required

You could also call this:

“Calculating cash basis adjustments when changing financial reporting methods”

If you choose to use a spreading method instead of a cash basis method, you need to calculate a cash basis adjustment. You do this as if you had stopped being a cash basis person.

When you become a cash basis person, you need to calculate a cash basis adjustment for financial arrangements you’re involved in at the end of the current and previous income years. But, you don’t need to do this if you choose to keep using a spreading method or if you’re already using a cash basis for the arrangement.

If you stop being a cash basis person, you need to calculate a cash basis adjustment for financial arrangements you’re involved in at the end of the current and previous income years. However, you don’t need to do this for arrangements already using a spreading method.

If you could be a cash basis person for a financial arrangement but don’t calculate the adjustment, you’re not considered a cash basis person for that arrangement.

To calculate a cash basis adjustment, you use the formula in section EW 63. The only income or expenditure for the arrangement in that income year is the cash basis adjustment.

A positive cash basis adjustment is income you earn in that income year. A negative adjustment is an expense you incur in that income year.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1515395.

Topics:
Money and consumer rights > Taxes
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EW 61: Election to use spreading method, or

“Option to switch from cash basis to spreading method for financial arrangements”

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EW 63: Cash basis adjustment formula, or

“How to calculate adjustments when changing money tracking methods”

Part E Timing and quantifying rules
Financial arrangements rules: Consideration when anti-avoidance provision applies

EW 62When and how calculation of cash basis adjustment required

  1. A cash basis person who chooses to use a spreading method must calculate a cash basis adjustment for the income year in which they choose to use a spreading method as if they had ceased to be a cash basis person.

  2. A person who becomes a cash basis person in an income year must calculate a cash basis adjustment for a financial arrangement to which they—

  3. are a party at the end of the income year; and
    1. were a party at the end of the previous income year.

      1. However,—

      2. a person who becomes a cash basis person in an income year and who chooses to continue using a spreading method in the income year must not calculate a cash basis adjustment; and
        1. a person who becomes a cash basis person in an income year must not calculate a cash basis adjustment for a financial arrangement that is already being accounted for on a cash basis.

          1. A person who ceases to be a cash basis person in an income year must calculate a cash basis adjustment for a financial arrangement to which they—

          2. are a party at the end of the income year; and
            1. were a party at the end of the previous income year.

              1. However, a person who ceases to be a cash basis person must not calculate a cash basis adjustment for a financial arrangement that is already subject to a spreading method.

              2. A person who would be a cash basis person for a financial arrangement if they calculated a cash basis adjustment for it, and who does not calculate the adjustment, is not a cash basis person for the arrangement.

              3. A person calculates a cash basis adjustment using the formula in section EW 63.

              4. The only income or expenditure under the financial arrangement for the income year to which the formula is applied is the cash basis adjustment.

              5. A cash basis adjustment is,—

              6. if positive, income, under section CC 3(1) (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.

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