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New Zealand law explained for everyone

Income Tax Act 2007

Recharacterisation of certain transactions - Recharacterisation of certain commercial arrangements

FA 17: Treatment when agreement ends: when buyer is cash basis person

You could also call this:

“How to calculate the sale price when a hire purchase agreement ends for cash basis buyers”

This law applies to you if you’re buying something through hire purchase and you use a cash basis for your accounting. When your hire purchase agreement ends, there’s a special way to work out the sale price.

The sale price is reduced by an amount for interest that you owe but haven’t paid yet. To figure out this amount, you use a simple math formula. You take the ‘prepaid expenditure’ and subtract the ‘expenditure’.

‘Prepaid expenditure’ is the money you would have spent if you weren’t using cash basis accounting. It’s calculated as if you were using one of the spreading methods for payments.

‘Expenditure’ is the money you’ve actually spent that’s treated as interest under your hire purchase agreement.

This helps make sure you’re not charged for interest you haven’t actually paid yet when your agreement ends.

Remember, this is just one part of the rules about hire purchase agreements. There are other sections that explain more about how these agreements work in tax law.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1516320.

Topics:
Money and consumer rights > Taxes
Money and consumer rights > Banking and loans
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FA 16: Treatment when agreement ends: when seller is cash basis person, or

“How to handle the end of a hire purchase agreement if you're a cash basis seller”

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FA 18: Treatment of amounts paid in income years after agreement ends, or

“How payments after a hire purchase agreement ends are treated for tax purposes”

Part F Recharacterisation of certain transactions
Recharacterisation of certain commercial arrangements

FA 17Treatment when agreement ends: when buyer is cash basis person

  1. This section applies for the purposes of section FA 15 when the buyer is a cash basis person.

  2. The amount treated as the buyer’s sale price in section FA 15(2) is reduced by an amount for accrued but unpaid interest on the hire purchase agreement calculated using the formula—

    prepaid expenditure − expenditure.

    Where:

    • In the formula,—

    • prepaid expenditure is the amount of prepaid expenditure that would have been incurred under 1 of the spreading methods for payments under the hire purchase agreement if—
      1. the buyer were not a cash basis person; and
        1. section EW 31 (Base price adjustment formula) did not apply to the buyer and the agreement in the income year when the agreement ends:
        2. expenditure is the amount of expenditure incurred by the buyer and treated as interest under the hire purchase agreement.

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