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EZ 34: Election to apply financial arrangements rules in subpart EW
or “Choose to use financial arrangement rules by calculating a transitional adjustment”
You could also call this:

“Calculating yearly income and spending for financial arrangements”

When you deal with financial arrangements, you need to calculate how much income or spending they create each year. This is called accruals. Here’s how it works:

If you’re holding or issuing a financial arrangement, you need to look at all the money involved - what you’ve paid, what you’ll pay, and the price of the arrangement.

You usually use a method called ‘yield to maturity’ to figure out the income or spending for each year. This should give a fair result. But if you have a different way that follows accounting rules and gives similar results, that’s okay too.

If all your financial arrangements are worth less than $1,500,000 in a year, you can use a simpler ‘straight-line’ method. Once you start using this method, you need to keep using it unless the Commissioner of Inland Revenue says you can change.

If you can’t use these methods, you can use another way that gives fair results. In some cases, you might even be able to use market values to calculate your income or spending.

The Commissioner can decide that some people don’t need to follow these rules for certain types of financial arrangements. This might happen if it’s too hard or expensive to follow the rules, and not following them wouldn’t make a big difference to the amount of income or deductions.

These rules don’t apply to everyone. For example, they don’t apply to cash basis holders or to some trusts that manage injury compensation payments.

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Next up: EZ 36: Excepted financial arrangement that is part of financial arrangement

or “How to handle a special part of a financial arrangement that's treated differently”
Next

Part E Timing and quantifying rules
Terminating provisions: Definitions

EZ 35Accruals in relation to income and expenditure in respect of financial arrangements

  1. For the purpose of calculating the amount deemed to be income or expenditure of any person under subsections (2) to (7), regard must be had to,—

  2. if the person is a holder in relation to the financial arrangement,—
    1. the amount of all consideration paid and to be paid to the person in relation to the financial arrangement; and
      1. any amount remitted and to be remitted by the person in relation to the financial arrangement; and
        1. the acquisition price of the financial arrangement in relation to the person; and
        2. if the person is an issuer in relation to the financial arrangement,—
          1. the amount of all consideration paid and to be paid by the person in relation to the financial arrangement; and
            1. the acquisition price of the financial arrangement in relation to the person.

            2. Subject to this section, where any person is a holder or an issuer of a financial arrangement, the amount that is deemed to be income or expenditure of that person in respect of the financial arrangement in any income year is an amount calculated using the yield to maturity method so as to result in the allocation to each income year of an amount that is fair and reasonable, and such amount so allocated to each income year is income deemed to be derived by or expenditure deemed to be incurred by the person in respect of the financial arrangement in the income year: provided that the Commissioner must accept an alternative method to the yield to maturity method, that has regard to the principles of accrual accounting, and—

            3. conforms with commercially acceptable practice; and
              1. except to the extent that the Commissioner may otherwise allow under subsection (8), is adopted by the person and is or will be consistently applied in respect of all such financial arrangements for financial reporting purposes; and
                1. results in the allocation to each income year of amounts that are not materially different from amounts that would be calculated but for this proviso.

                  1. Notwithstanding subsection (2), but subject to the other provisions of this section, where in any income year the total value of all financial arrangements of which a person is a holder or an issuer has on no day within that income year exceeded $1,500,000 or such greater amount as the Governor-General may by Order in Council declare for the purposes of this section,—

                  2. the person may calculate income or expenditure for that income year in respect of those financial arrangements by using the straight-line method so as to result in the allocation to that income year and subsequent income years of amounts that are fair and reasonable in respect of those arrangements; and
                    1. where the straight-line method is used under paragraph (a), that method must be used by the person in respect of all financial arrangements of which the person was the holder or issuer during that income year; and
                      1. where the person has in accordance with this subsection calculated income or expenditure using the straight-line method in respect of a financial arrangement for any income year, the person must, unless the Commissioner notifies them that they are otherwise authorised, continue to use that method in respect of that financial arrangement for any subsequent income year, until the maturity, remittance, sale, or other transfer of the arrangement, notwithstanding that the total value of all financial arrangements of which the person is holder or issuer may at any time in any such subsequent income year exceed $1,500,000 or such other amount as may be declared for the purposes of this section,—
                          1. and any amount calculated in respect of a financial arrangement in accordance with this subsection is income deemed to be derived by or expenditure deemed to be incurred by the person in respect of the financial arrangement for the relevant income year.

                        1. An Order in Council under subsection (3) is secondary legislation (see Part 3 of the Legislation Act 2019 for publication requirements).

                        2. For the purposes of subsection (3), a person must take into account financial arrangements to which subpart EW applies.

                        3. For the purposes of subsection (3),—

                        4. the value of any financial arrangement to be taken into account in determining whether the total value of all financial arrangements of which a person is the holder or issuer on any day exceeds $1,500,000 or such other amount as may be declared for the purposes of this section is,—
                          1. in the case of a fixed principal financial arrangement, the nominal or face value of the arrangement; and
                            1. in the case of a variable principal debt instrument, the amount owing by or to the person under the arrangement on the relevant day; and
                              1. in the case of a financial arrangement to which subpart EW applies, the value determined under that subpart; and
                              2. in the first income year for which income or expenditure is calculated under subsection (3) in respect of a financial arrangement that—
                                1. was acquired or issued by the person in a previous income year; and
                                  1. continues to be held or issued by the person at the end of the first income year for which income or expenditure is calculated under subsection (3),—
                                    2. the amount of income or expenditure of the person in respect of that financial arrangement for that first income year is an amount calculated in accordance with the following formula:
                                    a − b − c + d

                                    Where:

                                    • a a

                                      is the sum of all amounts that would have been income derived by the person in respect of the financial arrangement if the straight-line method referred to in subsection (3) had been applied to the financial arrangement from the date it was acquired or issued by the person until the end of that first income year

                                    • b b

                                      is the sum of all amounts that would have been expenditure incurred by the person in respect of the financial arrangement if the straight-line method referred to in subsection (3) had been applied to the financial arrangement from the date it was acquired or issued by the person until the end of that first income year

                                    • c c

                                      is the sum of all amounts of income deemed to have been derived by the person in respect of the financial arrangement before the commencement of that first income year

                                    • d d

                                      is the sum of all amounts deemed to have been expenditure incurred by the person in respect of the financial arrangement before the commencement of that first income year;—

                                    and any amount so calculated is, if a positive amount, deemed to be income derived by the person in that first income year and, if a negative amount, deemed to be expenditure incurred by the person in that first income year.

                                  2. Where it is not possible to calculate an amount to be deemed to be income or expenditure in respect of a financial arrangement using the yield to maturity method as provided for in subsection (2) or (in a case to which subsection (3) applies) the straight-line method as provided for in subsection (3), the amount that is deemed to be income or expenditure of the person in any income year is an amount calculated by the person—

                                  3. using the method, if any, prescribed by the Commissioner for the financial arrangement in a determination made under section 90(1)(c) of the Tax Administration Act 1994:
                                    1. in the absence of any such determination, by applying a method that meets the requirements of subparagraphs (i) and (ii) of the proviso to paragraph (a) and that results in the allocation to each income year of an amount that, having regard to the tenor of subsection (2), is fair and reasonable;—
                                        1. and such amount of income or expenditure so allocated to each income year is income deemed to be derived or, as the case may be, expenditure deemed to be incurred by the person in the income year.

                                      1. Notwithstanding subsections (2) and (6), the Commissioner must accept an alternative method for calculating the amount to be deemed to be income or expenditure of the person, in respect of a financial arrangement, to the methods provided for under subsections (2) and (6), if the alternative method has regard to market valuation, and—

                                      2. conforms with commercially acceptable practice; and
                                        1. except to the extent that the Commissioner may otherwise allow under subsection (8), is adopted by the person and is or will be consistently applied in respect of all such financial arrangements for financial reporting purposes; and
                                          1. either—
                                            1. the business of the person comprises dealing in such financial arrangements; or
                                              1. the financial arrangement is a forward or future contract for foreign exchange, or a futures contract; and
                                              2. the market, the method, and the source of the information used to determine the market values have been approved by the Commissioner under a determination issued under section 90(1)(e) of the Tax Administration Act 1994; and
                                                1. the person and any other person who is a holder (where the person is an issuer) or an issuer (where the person is a holder) of the financial arrangement are not associated persons;—
                                                    1. and such amount of income or expenditure so calculated is income deemed to be derived or, as the case may be, expenditure deemed to be incurred by the person in respect of the financial arrangement in the income year: provided that where income or expenditure in respect of a financial arrangement has been calculated by a person under this subsection, income or expenditure in respect of that financial arrangement must, except as otherwise allowed under subsection (8), continue to be calculated on that basis by that person until the maturity, remittance, sale, or other transfer of the arrangement.

                                                  1. Where a method of calculating income or expenditure in respect of a financial arrangement fails to meet the requirements of paragraph (b) of the proviso to subsection (2) or subparagraph (ii) of the proviso to subsection (6)(a) or (7)(b) by virtue of the fact that the method is not or will not be consistently applied by a person in respect of all such financial arrangements for financial reporting purposes, that method is nevertheless deemed to meet the relevant one of those provisions where the method—

                                                  2. appropriately reflects the dominant purpose for which the person acquired or issued the financial arrangement (or each such arrangement); and
                                                    1. has been and will be consistently applied by the person in respect of the particular financial arrangement (or each such financial arrangement) for the purposes of the old financial arrangements rules for every income year during its term (except to the extent that the Commissioner approves or may approve a change in method under the circumstances or conditions specified in a determination under section 90(1)(f) of the Tax Administration Act 1994); and
                                                      1. is not adopted for purposes that include the purpose of tax avoidance; and
                                                        1. has been approved by the Commissioner for adoption in the circumstances applicable to the taxpayer either by notice to the taxpayer or in a determination issued under section 90 of the Tax Administration Act 1994.

                                                          1. Subsections (2) to (7) do not apply—

                                                          2. to a cash basis holder; or
                                                            1. in relation to a financial arrangement and a person, in any income year where section EZ 38 applies to that person and to that financial arrangement; or
                                                              1. in relation to a financial arrangement where—
                                                                1. the financial arrangement is held by a trustee upon trust for the management of compensation paid for personal injury where that compensation is paid under the Workers Compensation Act 1956 or the Accident Compensation Act 1972 or the Accident Compensation Act 1982 or the Accident Rehabilitation and Compensation Insurance Act 1992 or the Accident Compensation Act 2001 or an order of court; and
                                                                  1. the trustee is, or if it were a natural person would be, a cash basis holder in respect of the financial arrangement.

                                                                  2. For the purposes of this section, the Commissioner may determine whether and to what extent any issuer or class of issuers is not required to comply with this section in relation to expenditure incurred or income derived in respect of any class of financial arrangements, having regard to—

                                                                  3. the nature and amount of the expenditure incurred or income derived by the issuer or class of issuers in respect of financial arrangements of that class; and
                                                                    1. the costs of the issuer or class of issuers in complying with this section in relation to the class of financial arrangements; and
                                                                      1. whether, in respect of that issuer or class of issuers and that class of financial arrangements, the application of the discretion given to the Commissioner under this subsection would result in a material difference in the amount of deductions or income allocated to any income year, in relation to the amount that would have been allocated had the discretion not been exercised.

                                                                        1. The Commissioner may at any time cancel any determination made in respect of any person or class of persons under subsection (10).

                                                                        Compare
                                                                        Notes
                                                                        • Section EZ 35(3)(c): amended, on , by section 43 of the Taxation (Transformation: First Phase Simplification and Other Measures) Act 2016 (2016 No 27).
                                                                        • Section EZ 35(3B): inserted, on , by section 3 of the Secondary Legislation Act 2021 (2021 No 7).
                                                                        • Section EZ 35(9)(c)(i): amended, on , by section 189 of the Taxation (GST and Remedial Matters) Act 2010 (2010 No 130).