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Income Tax Act 2007

Timing and quantifying rules - Financial arrangements rules

EW 15G: Modified fair value method

You could also call this:

“Special valuation method for certain financial arrangements in business”

When you enter into a financial arrangement as part of your regular business, but you’re not in the business of dealing with these arrangements, you might need to use a special way of valuing it. This is called the modified fair value method.

You can use this method if:

  1. The arrangement is in a foreign currency or is a type of financial contract called a derivative instrument.
  2. It’s not a foreign ASAP (a specific type of arrangement).
  3. It’s either not treated as a hedge in your financial reports, or it’s a hedge for something that’s not a financial arrangement.
  4. You and all the companies in your group have chosen to use this method and told the tax department about it.

When you use the modified fair value method, you don’t have to include certain amounts in your income for the year. These are amounts that you or your group have put into equity or other comprehensive income in your financial reports.

If you’re part of a group of companies, you might have to use this method even if you didn’t choose to. This happens if your group puts some amounts into equity or other comprehensive income for the arrangement, and another company in your group isn’t including similar amounts in their income.

This method helps make sure that complex financial arrangements are valued fairly for tax purposes, while still giving you some flexibility in how you report them.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1629862.

Topics:
Money and consumer rights > Taxes
Business > Industry rules
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EW 15F: Expected value method, or

“Calculating expected value for certain financial arrangements”

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EW 15H: Mandatory use of some determinations, or

“You must use specific methods for certain financial arrangements”

Part E Timing and quantifying rules
Financial arrangements rules

EW 15GModified fair value method

  1. This section applies when—

  2. a person has entered into a financial arrangement in the ordinary course of their business and the person is not in the business of dealing in relation to the financial arrangement; and
    1. the financial arrangement is denominated in a currency other than New Zealand dollars or is a derivative instrument; and
      1. the financial arrangement is not a foreign ASAP; and
        1. the financial arrangement—
          1. is not treated under IFRSs by the person as a hedge; or
            1. is treated under IFRSs by the person as a hedge of other financial arrangements, for each of which the person does not use the fair value method; or
              1. is treated under IFRSs by the person as a hedge of something that is not a financial arrangement; and
              2. the person and all companies in a group of companies to which the person belongs have chosen to use the modified fair value method and have notified the Commissioner at the time of filing a return of income.

                1. A person who is a member of a group of companies and has notified an election under subsection (1)(d) is not required under this section to use the modified fair value method for a financial arrangement if—

                2. the person does not have a business of a substantially similar nature to a business of another company in the group; and
                  1. the financial arrangement is with other parties, of which—
                    1. none are associated with the person or a member of the group; or
                      1. all are associated with the person and use the method used by the person for the arrangement; and
                      2. subsection (3) does not require the person to use the modified fair value for the financial arrangement.

                        1. The person must use the fair value method, modified so that the following are not required to be allocated to an income year:

                        2. an amount allocated by the person to equity, equity reserves, or other comprehensive income under IFRSs for the financial arrangement:
                          1. an amount not allocated by the person to equity, equity reserves, or other comprehensive income under IFRSs for the financial arrangement, if—
                            1. the person and another person (the other person) are members of the same wholly-owned group; and
                              1. the person and the other person are members of the same group consolidated under IFRSs; and
                                1. the financial arrangement is related to an arrangement (the other arrangement) of the other person; and
                                  1. the other person does not use the fair value method for the other arrangement; and
                                    1. the group consolidated under IFRSs makes an allocation, to equity, equity reserves, or other comprehensive income under IFRSs, corresponding to the amount.

                                    2. A person who is a member of a wholly-owned group and of a group consolidated under IFRSs (the consolidated group) must use the modified fair value method for a financial arrangement if—

                                    3. the person or the consolidated group allocates an amount to equity, equity reserves, or other comprehensive income under IFRSs for the financial arrangement; and
                                      1. a member of the consolidated group, under subsection (2)(b), does not allocate to the income year an amount for a financial arrangement.

                                        Compare
                                        Notes
                                        • Section EW 15G: inserted, on , by section 366 of the Taxation (Business Taxation and Remedial Matters) Act 2007 (2007 No 109).
                                        • Section EW 15G(1)(bb): inserted (with effect on 1 April 2011 and applying for a financial arrangement entered into by a person (a) in the 2014–15 income year and later income years, unless paragraph (b) applies; (b) in an income year (the first income year) and later income years, if the person files a return of income for the first income year on the basis that this section applies to a financial arrangement entered into in the first income year, and the first income year is the 2011–12, 2012–13, 2013–14, or 2014–15 income year, and the person uses IFRSs to prepare financial statements or to report for financial arrangements for the first income year), on , by section 78(1) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                        • Section EW 15G(1)(c): substituted (with effect on 1 April 2008), on , by section 138(1) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                        • Section EW 15G(1)(c)(ii): amended (with effect on 1 April 2008), on , by section 38 of the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Act 2010 (2010 No 109).
                                        • Section EW 15G(1)(c)(iii): added (with effect on 1 April 2008), on , by section 38 of the Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Act 2010 (2010 No 109).
                                        • Section EW 15G(1)(d): substituted (with effect on 1 April 2008), on , by section 138(2) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                        • Section EW 15G(1B) heading: inserted (with effect on 1 April 2008), on , by section 138(3) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                        • Section EW 15G(1B): inserted (with effect on 1 April 2008), on , by section 138(3) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                        • Section EW 15G(2): substituted (with effect on 1 April 2008), on , by section 138(4) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                        • Section EW 15G(2)(a): amended, on , by section 133(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                        • Section EW 15G(2)(b): amended, on , by section 133(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                        • Section EW 15G(2)(b)(v): amended, on , by section 133(3) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                        • Section EW 15G(3) heading: added (with effect on 1 April 2008), on , by section 138(5) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                        • Section EW 15G(3): added (with effect on 1 April 2008), on , by section 138(5) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).
                                        • Section EW 15G(3)(a): amended, on , by section 133(4) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                        • Section EW 15G list of defined terms foreign ASAP: inserted (with effect on 1 April 2011 and applying for a financial arrangement entered into by a person: (a) in the 2014–15 income year and later income years, unless paragraph (b) applies; (b) in an income year (the first income year) and later income years, if the person files a return of income for the first income year on the basis that this section applies to a financial arrangement entered into in the first income year, and the first income year is the 2011–12, 2012–13, 2013–14, or 2014–15 income year, and the person uses IFRSs to prepare financial statements or to report for financial arrangements for the first income year), on , by section 78(2) of the Taxation (Annual Rates, Employee Allowances, and Remedial Matters) Act 2014 (2014 No 39).
                                        • Section EW 15G list of defined terms wholly-owned group: added (with effect on 1 April 2008), on , by section 138(6) of the Taxation (International Taxation, Life Insurance, and Remedial Matters) Act 2009 (2009 No 34).