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Income Tax Act 2007

Timing and quantifying rules - Spreading of specific expenditure

EJ 10B: IFRS leases

You could also call this:

“Tax treatment for certain leases under NZ IFRS 16 accounting standard”

This section explains how you handle tax for certain types of leases if you’re using a special accounting rule called NZ IFRS 16. Here’s what you need to know:

You can use this rule if you’re leasing personal property, you’re using NZ IFRS 16 in your financial statements, the person you’re leasing from isn’t connected to you, you’re not subleasing the property to someone else, and you choose to use this rule in your tax return.

If the lease is for $100,000 or less and lasts 4 years or less, you can simply claim a tax deduction for the amount you’ve put in your profit and loss account for that year.

For bigger or longer leases, you use a special calculation to work out your tax deduction. This calculation takes into account things like the value of the lease asset and any costs for fixing up the property at the end of the lease.

You can claim some costs, like those for fixing up the property, in the year you actually spend the money.

If your lease ends or doesn’t meet the rules anymore, you need to do a final calculation to work out if you owe more tax or can claim more deductions.

If you’ve been using NZ IFRS 16 for a while but haven’t been using this tax rule, there’s a way to catch up. You spread the difference over five years.

Remember, this is just a simple explanation. The actual rules are quite detailed, so it’s a good idea to get help from a tax expert if you need to use these 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=LMS480780.

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Part E Timing and quantifying rules
Spreading of specific expenditure

EJ 10BIFRS leases

  1. This section applies in relation to an operating lease of a personal property lease asset (the IFRS lease), if—

  2. the person, as lessee, uses NZ IFRS 16 in their financial statements for the IFRS lease; and
    1. the lessor for the IFRS lease is not associated with the person; and
      1. the person does not sublease the personal property lease asset to another person; and
        1. the person irrevocably chooses to use this section for the IFRS lease, as evidenced by a return of income made in accordance with this section.

          1. If the initial right of use asset under NZ IFRS 16 is $100,000 or less and the remaining term of the IFRS lease under NZ IFRS 16 is 4 years or less initially and immediately after any extension starts, then the person, as lessee for the IFRS lease, is allowed, for an income year, a deduction for a positive amount, and has income for a negative amount, for the total amount recognised by the person through their profit and loss account for the IFRS lease for the income year, if the amount is in accordance with NZ IFRS 16.

          2. If subsection (2) does not apply, then the person, as lessee for the IFRS lease, is allowed, for an income year, a deduction for a positive amount, and has income for a negative amount, for amounts calculated using the formula—

            accounting amount − add-back adjustment + impairment and revaluation adjustment − make-good and direct costs adjustment.

            Where:

            • In the formula in subsection (3),—

            • accounting amount is the total amount recognised by the person through their profit and loss account for the IFRS lease for the income year, if the amount is in accordance with NZ IFRS 16:
              1. add-back adjustment is the total amount of the accounting measures in subparagraphs (i) and (ii), used by the person in accordance with IFRS through their profit and loss account for the income year—
                1. impairment of the lease asset described in paragraph 33 of NZ IFRS 16 arising in the income year:
                  1. revaluation or impairment of the lease asset described in paragraph 35 of NZ IFRS 16 arising in the income year:
                  2. impairment and revaluation adjustment is the total amount of the add-back adjustment for any income year under paragraph (b) spread proportionally on a daily basis over the remaining income years of the lease term:
                    1. make-good and direct costs adjustment is the total amount of the accounting measures in subparagraphs (i) and (ii), spread proportionally on a daily basis over the remaining income years of the lease term—
                      1. make-good costs for the lease described in paragraph 24(d) of NZ IFRS 16:
                        1. direct costs for the lease described in paragraph 24(c) of NZ IFRS 16, if the person chooses to apply this subparagraph, as evidenced by a return of income made in accordance with this subparagraph.

                        2. The person, as lessee, is allowed a deduction for the IFRS lease for—

                        3. make-good costs, described in subsection (4)(d)(i), for the income year that they incur the costs:
                          1. direct costs, described in subsection (4)(d)(ii), for the income year that they incur the costs, if they have chosen to apply subsection (4)(d)(ii).

                            1. The person, as lessee, has income for a positive amount, and is allowed a deduction for a negative amount, for the income year in which the IFRS lease ends or does not meet a requirement in subsection (1)(a), (b), or (c), calculated using the formula—

                              IFRS deductions − IFRS income − expenditure.

                              Where:

                              • In the formula in subsection (6),—

                              • IFRS deductions is the total amount deducted for the IFRS lease for all income years, including when the person has not applied this section:
                                1. IFRS income is the total amount of income for the IFRS lease for all income years, including when the person has not applied this section:
                                  1. expenditure is the amount of expenditure for the IFRS lease for all income years, ignoring this section.

                                    1. If the person has applied NZ IFRS 16 retrospectively for the IFRS lease or has not applied this section for the IFRS lease while they have applied NZ IFRS 16 for it, then the person is allowed a deduction for a positive amount and has income for a negative amount, spread in equal proportions over the income year and the following 4 income years, calculated using the formula—

                                      retrospective accounting expenditure − retrospective tax adjustments − previous tax deductions.

                                      Where:

                                      • In the formula in subsection (8),—

                                      • retrospective accounting expenditure is the total amount of expenditure or loss recognised under NZ IFRS 16 for the IFRS lease for the income years that the person has applied NZ IFRS 16 retrospectively for the IFRS lease or has not applied this section for the IFRS lease while they have applied NZ IFRS 16 for it, if the amount is in accordance with NZ IFRS 16:
                                        1. retrospective tax adjustments is the total amount of adjustments and deductions in subsections (4)(b), (c), and (d) and (5) for the income years that the person has applied NZ IFRS 16 retrospectively for the IFRS lease or has not applied this section for the IFRS lease while they have applied NZ IFRS 16 for it, treating subsections (4)(b), (c), and (d) and (5) as applying for those income years:
                                          1. previous tax deductions is the total amount of deductions not in accordance with NZ IFRS 16 and not provided by this section, for the income years that the person has applied NZ IFRS 16 retrospectively for the IFRS lease or has not applied this section for the IFRS lease while they have applied NZ IFRS 16 for it.

                                            Notes
                                            • Section EJ 10B: inserted (with effect on 1 January 2019), on , by section 44(1) (and see section 44(2) for application) of the Taxation (Annual Rates for 2020–21, Feasibility Expenditure, and Remedial Matters) Act 2021 (2021 No 8).
                                            • Section EJ 10B(6): amended (with effect on 1 January 2019), on , by section 84(1)(a) (and see section 84(2) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).
                                            • Section EJ 10B(6): amended (with effect on 1 January 2019), on , by section 84(1)(b) (and see section 84(2) for application) of the Taxation (Annual Rates for 2021–22, GST, and Remedial Matters) Act 2022 (2022 No 10).