EZ 38Income and expenditure where financial arrangement redeemed or disposed of

1. Subject to subsection (2), where, in relation to any person, a financial arrangement matures or is remitted (other than by way of being written off as a bad debt), sold, or otherwise transferred by the person in any income year, the amount of the base price adjustment in relation to that income year, that person, and that financial arrangement is an amount calculated in accordance with the following formula:

   $a\; -\; (b\; +\; c)$

   Where:

   • a a

     is,—

   • in the case of a holder, the sum of—
     1. the amount of all consideration that has been paid, and all further consideration that has or will become payable, to the person; and
     2. any amounts that have been remitted by the person and that are not included in subsubparagraph (A):
   • in the case of an issuer, the sum of—
     1. the amount of all consideration that has been paid, and all further consideration that has or will become payable, by the person; and
     2. the amount paid by the person associated with the issuer if the issuer is the debtor of a debt to which section EZ 41 applies—
   in relation to the financial arrangement
   • b b

     is the acquisition price of the financial arrangement in relation to the person

   • c c

     is,—

   • in the case of a holder, all amounts that are income derived, less the aggregate of amounts of expenditure deemed to be incurred under section EZ 35 or EZ 42 or deemed to be a deduction under section EZ 37 by the person in respect of the financial arrangement in all previous income years since the acquisition of the financial arrangement; and
   • in the case of an issuer, all amounts of expenditure incurred in respect of the financial arrangement in all previous income years since the issue of the financial arrangement, less the aggregate of—
     1. all amounts that are income deemed to be derived under section EZ 35 or EZ 37 or EZ 42 by the person in respect of the financial arrangement in all previous income years since the issue of the financial arrangement; and
     2. all amounts that are dividends derived by the person from the release of the obligation to repay the amount lent; and
     3. all amounts that are income of the person under section CF 2 in respect of the financial arrangement.

2. Where, in relation to a financial arrangement, a person is a cash basis holder, and the financial arrangement matures or is remitted (other than by way of being written off as a bad debt), sold, or otherwise transferred by that person in any income year, the amount of the cash base price adjustment in relation to that income year, that person, and that financial arrangement is an amount calculated in accordance with the following formula:

   $a\; -\; (b\; +\; c)$

   Where:

   • a a

     is the sum of all consideration derived in respect of the financial arrangement by the person, and amounts remitted by the person

   • b b

     is the acquisition price of the financial arrangement

   • c c

     is the sum of all amounts that are income derived by the person, less the aggregate of amounts of expenditure deemed to be incurred under sections EZ 35 and EZ 42 or deemed to be a deduction under section EZ 37.

3. Subject to subsection (5), the amount of the base price adjustment in relation to any financial arrangement and any income year is,—

4. in relation to a holder,—
   1. where it is a positive amount, deemed to be income derived by the holder in the income year; and
   2. where it is a negative amount, deemed to be a deduction of the holder in the income year:
5. in relation to an issuer,—
   1. where it is a positive amount, deemed to be expenditure incurred by the issuer in the income year; and
   2. where it is a negative amount, deemed to be income derived by the issuer in the income year.

6. Subject to subsection (5), the amount of the cash base price adjustment in relation to any financial arrangement and any income year is,—

7. where it is a positive amount, deemed to be income derived by the cash basis holder in the income year; and
8. where it is a negative amount, deemed to be a deduction of the cash basis holder in the income year.

9. Notwithstanding anything in section EZ 50(3), where a financial arrangement is sold or otherwise transferred by a person for a consideration influenced by—

10. a decline in the creditworthiness of the issuer between the date of acquisition of the financial arrangement by the holder and the date of sale or other transfer; or
11. an increase in the possibility that the issuer may fail to meet any obligations under the financial arrangement between the date of acquisition of the financial arrangement by the holder and the date of sale or other transfer; or
12. the occurrence of any event reducing or cancelling the obligations of an issuer under the financial arrangement,—
all amounts that would have been received but for the factors listed above are deemed, in calculating the base price adjustment or cash base price adjustment, to have become payable to the holder: provided that this subsection does not apply where the business of the holder comprises holding or dealing in financial arrangements of that class, and the issuer of the financial arrangement and the holder are not associated persons.

13. Where—

14. a person has been released from the obligation to make payment of an amount—
    1. under a financial arrangement by operation of section 304 of the Insolvency Act 2006; or
    2. under any of the Inland Revenue Acts (and whether the relief arises through remission, waiver, or cancellation); or
    3. under a social assistance suspensory loan by virtue of that person satisfying the conditions referred to in subsection (8)(c)(ii); and
15. that amount would, but for this subsection, be taken into account in determining the income derived by or expenditure incurred by that person under the old financial arrangements rules,—
that amount is, for the purpose of determining the income derived by or expenditure incurred by that person, and notwithstanding the old financial arrangements rules (other than this subsection), deemed to have been paid under that financial arrangement when the obligation to make payment has been so released.

16. Notwithstanding anything in this Act, where and to the extent that a person (in this subsection called the surety) suffers expenditure or a loss under a security arrangement and the expenditure or loss, in whole or in part, is due to—

17. the actions of; or
18. the occurrence, or failure to occur, of an event that was potentially or actually subject to the influence of—
the surety or any person with whom the surety was, during the term of the security arrangement, an associated person, no deduction is allowed to the surety or any person in relation to the expenditure or loss.

19. In this section,—

20. the expression holder, in relation to a financial arrangement, includes a person who ceases to be a holder of the financial arrangement as provided in subsection (1) or (2); and
21. the expression issuer, in relation to a financial arrangement, includes a person who ceases to be an issuer of the financial arrangement as provided in subsection (1); and
22. the expression social assistance suspensory loan means a loan—
    1. made by a department or instrument of the Executive Government of New Zealand; and
    2. under whose terms the issuer’s liability may be remitted in whole or in part if the issuer satisfies conditions intended to promote a social policy objective of the Government of New Zealand; and
    3. of a kind that is declared by the Governor-General by Order in Council to be a social assistance suspensory loan; and
23. a financial arrangement is deemed to be remitted where—
    1. the issuer has been discharged from making all remaining payments under that financial arrangement without fully adequate consideration; or
    2. the issuer has been released from making all remaining payments under that financial arrangement by the operation of the Insolvency Act 2006 or the Companies Act 1993 or the laws of any country or territory other than New Zealand, or by any deed or agreement of composition with its creditors; or
    3. all of the remaining payments under the financial arrangement have become irrecoverable or unenforceable by action through the lapse of time; or
    4. the financial arrangement is a debt that is disposed of at a discount to a person associated with the debtor under the circumstances described in section EZ 41; and
24. where a person ceases to be a New Zealand resident any financial arrangement in relation to which that person is an issuer or a holder is deemed, in relation to the person, to have been transferred for its market value at that date.

25. An Order in Council under subsection (8)(c)(iii) is secondary legislation (see Part 3 of the Legislation Act 2019 for publication requirements).

Compare

• 2004 No 35 s EZ 35

Notes

• Section EZ 38(6)(a)(iii): amended (with effect on 1 April 2008), on 6 October 2009, by section 197(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
• Section EZ 38(8)(d)(ii): amended, on 5 December 2013, by section 14 of the Companies Amendment Act 2013 (2013 No 111).
• Section EZ 38(8)(d)(iv): amended (with effect on 1 April 2015 and applying for the 2015–16 and later income years), on 24 February 2016, by section 242(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
• Section EZ 38(9): inserted, on 28 October 2021, by section 3 of the Secondary Legislation Act 2021 (2021 No 7).