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Income Tax Act 2007

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

EW 63: Cash basis adjustment formula

You could also call this:

“How to calculate adjustments when changing money tracking methods”

You can use a special math formula to figure out how much money you need to adjust when you switch between different ways of keeping track of your money. This is called a cash basis adjustment.

The formula looks like this: adjusted income minus adjusted expenditure minus previous income plus previous expenditure.

Adjusted income means different things depending on your situation. If you’re starting to use the cash basis method, it’s the money you would have earned if you had been using this method from the beginning. If you’re stopping the cash basis method, it’s the money you would have earned if you had been using a different method from the start.

Adjusted expenditure is similar. If you’re starting the cash basis method, it’s the money you would have spent if you had been using this method from the beginning. If you’re stopping the cash basis method, it’s the money you would have spent if you had been using a different method from the start.

Previous income is simply the money you’ve already earned from this financial arrangement in past years.

Previous expenditure is the money you’ve already spent on this financial arrangement in past years.

By using this formula, you can figure out how much you need to adjust your finances when you change your accounting method.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1515397.

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

EW 63Cash basis adjustment formula

  1. A person calculates a cash basis adjustment using the formula—

    adjusted income − adjusted expenditure − previous income + previous expenditure.

    Where:

    • The items in the formula are defined in subsections (3) to (6).

    • Adjusted income is,—

    • for a person who becomes a cash basis person, the amount that would have been income derived by the person under the financial arrangement if the person had been a cash basis person in the period starting on the date on which they became a party to the arrangement and ending on the last day of the income year for which the calculation is made; and
      1. for a person who ceases to be a cash basis person, the amount that would have been income derived by the person under the financial arrangement if the person had been required to use a spreading method in the period starting on the date on which they became a party to the arrangement and ending on the last day of the income year for which the calculation is made.

        1. Adjusted expenditure is,—

        2. for a person who becomes a cash basis person, the amount that would have been expenditure incurred by the person under the financial arrangement if they had been a cash basis person in the period starting on the date on which they became a party to the arrangement and ending on the last day of the income year for which the calculation is made; and
          1. for a person who ceases to be a cash basis person, the amount that would have been expenditure incurred by the person under the financial arrangement if the person had been required to use a spreading method in the period starting on the date on which they became a party to the arrangement and ending on the last day of the income year for which the calculation is made.

            1. Previous income is income derived by the person under the financial arrangement in earlier income years.

            2. Previous expenditure is expenditure incurred by the person under the financial arrangement in earlier income years.

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