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Income Tax Act 2007

Timing and quantifying rules - Terminating provisions - Definitions

EZ 42: Post facto adjustment

You could also call this:

“Adjusting tax for unusual changes in financial arrangements”

When you have a financial arrangement, sometimes the amount you pay or receive can be changed by you, the other person, or someone else connected to either of you. This is called a post facto adjustment. It applies when:

  • The changes in payment aren’t based on normal economic factors or interest rates.
  • This kind of arrangement isn’t a usual business practice.
  • The arrangement tries to avoid following the old financial arrangement rules.

If your financial arrangement fits this description, both you and the other person need to recalculate your taxes:

  • In the year when you stop being part of the arrangement.
  • Five years after you started the arrangement, if you’re still part of it.
  • Every five years after that, until you’re no longer part of the arrangement.

To do this recalculation, you need to:

  1. Look at all the money paid or owed in the arrangement.
  2. Use a special method called ‘yield to maturity’ to work out the income or expenses for each year.
  3. Recalculate your taxes using these new figures.

After you’ve done this, you need to tell the tax department by filling out a special form. You need to do this by the same time you usually file your tax return.

Even if it’s past the usual time limit, the tax department will change your tax assessment for those years based on your recalculation.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1516129.

Topics:
Money and consumer rights > Taxes
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“Rules for handling debt instruments with changing principal amounts on a specific date”

Part E Timing and quantifying rules
Terminating provisions: Definitions

EZ 42Post facto adjustment

  1. A financial arrangement is subject to the provisions of this section where—

  2. any of the amount or amounts payable under the financial arrangement are determined in the terms of the financial arrangement, as to whole or part, at the discretion of either the issuer or the holder, or both of them, or at the discretion of any other person where either the issuer or the holder and the other person are associated persons; and
    1. the change in the amount or amounts payable under the financial arrangement upon the exercise of a discretion as provided for in paragraph (a) does not reflect changes in economic, commodity, industrial, or financial indices or banking or general commercial rates; and
      1. the making of such financial arrangements is not generally accepted commercial practice; and
        1. the effect of the arrangement is to defeat the intent and application of the old financial arrangements rules.

          1. Where a financial arrangement is subject to the provisions of this section, both the holder and the issuer of the financial arrangement are required to calculate a post facto adjustment in respect of the following income years:

          2. the income year in which the person ceases to be a holder or an issuer, as the case may be, in respect of the financial arrangement; and
            1. where the person has not ceased to be a holder or an issuer of the financial arrangement at the end of the fifth income year following the income year of its issue or acquisition by the person, in that fifth income year; and
              1. until the person ceases to be an issuer or a holder in respect of the financial arrangement, in every fifth income year succeeding the income year in which the post facto adjustment was last required to be made under this section.

                1. In order to calculate the post facto adjustment, a person must,—

                2. having regard to all amounts specified in section EZ 35(1) which have been paid or are payable, in respect of the financial arrangement, since acquisition or issue of the financial arrangement by the person to the end of the income year in which the post facto adjustment applies, calculate amounts of income or expenditure under the arrangement for each income year using the yield to maturity method as prescribed in a determination made by the Commissioner for the purposes of section EZ 35(2):
                  1. recalculate the income tax liability for each income year using the amounts of income or expenditure calculated under paragraph (a) in substitution for the amounts of income or expenditure previously calculated in respect of the financial arrangement for each income year.

                    1. Where a person has been required to calculate the post facto adjustment, the person is required to make a special return in respect of the post facto adjustment in the form required by the Commissioner, no later than the time at which that person is required to file an annual return for the income year in which the post facto adjustment is made.

                    2. Despite the time bar, the Commissioner must amend the person’s assessment for the income years to which the post facto adjustment relates in accordance with the alterations to that income or expenditure as calculated by the post facto adjustment.

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