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Income Tax Act 2007

Timing and quantifying rules - Terminating provisions - Definitions

EZ 51: Transitional adjustment when changing to financial arrangements rules

You could also call this:

“How to adjust your taxes when switching to new financial arrangement rules”

You can choose to use the new financial arrangements rules for a financial arrangement that currently uses the old rules. If you do this, you must use the new rules for all your financial arrangements.

When you switch to the new rules, your financial arrangement is treated as if it started on or after 20 May 1999. You need to work out a transitional adjustment for the year you make the change and report the income or spending from this adjustment.

To calculate the transitional adjustment, you use a formula that compares the income and spending under both the old and new rules. The formula looks at the entire time you’ve had the arrangement, up to the end of the year you’re making the change.

If the result of the calculation is positive, it’s income for that year. If it’s negative, it’s an expense for that year. In the year you make the adjustment, you only need to report the income or expense from this adjustment for the financial arrangement.

There’s a special rule if your arrangement used the old rules but was started on or after 20 May 1999 and wouldn’t have been covered by the new rules. In this case, you treat the arrangement as if you sold it at market value at the end of the year you make the change. You then need to do a calculation called a base price adjustment, which is explained in section EZ 38.

Remember, if section EZ 38 applies to your financial arrangement in the year you make the change, you must follow that section’s rules.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1516239.

Topics:
Money and consumer rights > Taxes
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EZ 50: Rules for non-market transactions, or

“Rules for fair pricing in financial transactions between connected parties”

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EZ 52: References to new rules include old rules, or

“New rules for financial arrangements may also apply to old arrangements”

Part E Timing and quantifying rules
Terminating provisions: Definitions

EZ 51Transitional adjustment when changing to financial arrangements rules

  1. A person may elect to apply the financial arrangements rules to a financial arrangement to which the old financial arrangements rules apply.

  2. A person who makes an election must apply the financial arrangements rules to all financial arrangements to which the person is a holder or an issuer.

  3. Despite subsections (1) and (2), a person must apply section EZ 38 if that section applies to a financial arrangement in the income year in which the election is made.

  4. Once an election is made, the financial arrangement is subject to the financial arrangements rules and is treated in the same way as a financial arrangement that was entered into on or after 20 May 1999.

  5. A person who makes an election must calculate a transitional adjustment for the income year of election and return the resulting income or expenditure.

  6. The transitional adjustment is calculated using the formula—

    income (financial arrangements rules)− expenditure (financial arrangements rules) − income (old financial arrangements rules)+ expenditure (old financial arrangements rules)

    Where:

      where—

      income (financial arrangements rules) is the total amount of income that would be derived by the person from the financial arrangement if the financial arrangements rules were applied to the financial arrangement for the period beginning on the date the person acquires the arrangement and ending on the last day of the income year in which this calculation is made

        expenditure (financial arrangements rules) is the total amount of expenditure that would be incurred by the person under the financial arrangement if the financial arrangements rules were applied to the financial arrangement for the period beginning on the date the person acquires the arrangement and ending on the last day of the income year in which this calculation is made

          income (old financial arrangements rules) is the total amount of income of the person from the financial arrangement in all income years before the income year in which this calculation is made

            expenditure (old financial arrangements rules) is the total amount of expenditure incurred by the person under the financial arrangement in all income years before the income year in which this calculation is made.

            1. The result of the transitional adjustment is,—

            2. if a positive amount, income derived by the person in the income year; and
              1. if a negative amount, expenditure incurred by the person in the income year.

                1. In the income year in which the transitional adjustment is made to a financial arrangement, a person must take into account only the income derived or the expenditure incurred as a result of the adjustment for the financial arrangement.

                2. Despite subsections (2) to (8), a person is treated as transferring a financial arrangement at market value at the end of the income year of election and must calculate a base price adjustment under section EZ 38 if—

                3. the financial arrangement is an arrangement to which the old financial arrangements rules apply; and
                  1. the financial arrangement were entered into on or after 20 May 1999 and would not have been subject to the financial arrangements rules; and
                    1. the person elects to apply the financial arrangements rules to a financial arrangement to which the old financial arrangements rules apply.

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