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Income Tax Act 2007

Recharacterisation of certain transactions - Recharacterisation of certain commercial arrangements

FA 11: Adjustments for leases that become finance leases

You could also call this:

“Changes in tax reporting when a regular lease becomes a finance lease”

This law applies when you lease something, like a piece of equipment, and the lease changes from a regular lease to a special type called a finance lease. This can happen if the lease lasts longer than expected or if certain conditions are met.

If your lease becomes a finance lease, you need to change how you report your income and expenses for tax purposes. You do this by making an adjustment in your tax return for the year when the lease changes.

To figure out the adjustment, you use a special calculation. You compare what your income and expenses would have been if it was always a finance lease, to what they actually were under the regular lease.

If the result of this calculation is positive, you need to report it as extra income. If it’s negative, you can claim it as a deduction on your taxes.

The law also mentions that for aircraft, some specific expenses related to engines are treated differently when making these calculations.

Remember, if you’re unsure about how this applies to you, it’s a good idea to ask for help from a grown-up or a tax expert.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1516292.

Topics:
Money and consumer rights > Taxes
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“Rules for when a rented item is returned at the end of a long-term lease”

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FA 11B: Adjustments for certain operating leases, or

“How to adjust taxes for certain long-term leases”

Part F Recharacterisation of certain transactions
Recharacterisation of certain commercial arrangements

FA 11Adjustments for leases that become finance leases

  1. This section applies when a lease is entered into on or after 20 May 1999 and—

  2. the lease is a consecutive or a successive lease—
    1. that is treated as 1 lease under the definition of lease; and
      1. with a term of the lease that the lessor and lessee do not contemplate, at the start of the term, will be more than 75% of the personal property lease asset's estimated useful life; and
        1. with a term of the lease that is more than 75% of the asset's estimated useful life:
        2. the lease is an operating lease that becomes a finance lease under paragraph (c) of the definition of finance lease.

          1. The lessor and lessee must each adjust their income and expenditure calculated for the lease by including an adjustment in a return of income for the tax year corresponding to the income year in which the lease becomes a finance lease.

          2. The amount of the adjustment is calculated for the relevant person in relation to the period described in subsection (5) using the formula—

            finance income − finance expenditure − unadjusted income+ unadjusted expenditure.

            Where:

            • In the formula,—

            • finance income is the income that would have been derived by the person under the lease if the lease were a finance lease for the period:
              1. finance expenditure is the expenditure that would have been incurred by the person under the lease if the lease were a finance lease for the period:
                1. unadjusted income is the income derived by the person under the lease:
                  1. unadjusted expenditure is the expenditure incurred by the person under the lease.

                    1. The period starts on the date on which the lease starts and ends on the last day of the income year in which the lease becomes a finance lease.

                    2. If the adjustment is positive, the amount is income of the relevant person under section CH 6 (Adjustments for certain finance and operating leases).

                    3. If the adjustment is negative, the amount is a deduction of the relevant person under section DB 51B (Adjustments for leases that become finance leases).

                    4. Expenditure of a person that relates to an aircraft including an unpriced aircraft engine and is deductible for the person under sections DW 5 and DW 6 (which relate to aircraft engine acquisitions and overhauls) is not included in an amount of consideration paid by the person for the aircraft, for the purposes of this section.

                    Compare
                    Notes
                    • Section FA 11: substituted, on , by section 406 of the Taxation (Business Taxation and Remedial Matters) Act 2007 (2007 No 109).
                    • Section FA 11(8) heading: inserted, on (applying for the 2017–18 and later income years), by section 97(1) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                    • Section FA 11(8): inserted, on (applying for the 2017–18 and later income years), by section 97(1) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                    • Section FA 11 list of defined terms aircraft engine: inserted, on , by section 97(2) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                    • Section FA 11 list of defined terms consideration: inserted, on , by section 97(2) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).
                    • Section FA 11 list of defined terms unpriced aircraft engine: inserted, on , by section 97(2) of the Taxation (Annual Rates for 2016–17, Closely Held Companies, and Remedial Matters) Act 2017 (2017 No 14).