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NZ To Simplify Financial Arrangements Rules

by Mary Swire, Tax-News,com, Hong Kong

20 December 2012

The New Zealand government is to simply the financial arrangements rules for agreements relating to the sale and purchase of property or services, following submissions by a number of businesses to the Inland Revenue about the taxation rules for such transactions.

According to Revenue Minister Peter Dunne, the complexity of the current rules is now seen as inappropriate. "The proposed changes will have a beneficial impact on business taxpayers who sell or buy property or services. They will be particularly welcomed by businesses who export and import capital equipment," he explained.

The government is using the opportunity afforded by the introduction of International Financial Reporting Standards (IFRS) to simplify the rules. From the 2013/14 income year, it will become mandatory for IFRS taxpayers to follow their financial reporting treatment for almost all of their agreements for the sale and purchase of goods and services.

The 2013/14 start date is considered the least disruptive application date for the majority of taxpayers, and will not impact on provisional tax payments for current income years.

IFRS taxpayers will nonetheless be able to elect to apply the accounting treatment to new arrangements from the 2011/12 income year. It is also proposed that the tax treatment for any existing arrangements, associated hedges and the underlying property or services for income years before IFRS taxpayers adopt the IFRS tax treatment, or the 2013-14 income year for non-IFRS taxpayers, be validated.

The tax treatment of existing arrangements will not be allowed to change to another current or new alternative method. However, IFRS taxpayers will be able to elect that forward exchange contracts (FECs) entered into from 2013/14 can follow the IFRS accounting treatment for tax if designated as hedges of the foreign exchange risks on existing arrangements. The election will then have to be adopted for all new FECs designated as hedges of existing arrangements from that income year.

An exception will be provided to capital account transactions, excluding those for depreciable property. Non-depreciable capital items will be dealt with at spot, and any hedging of non-capital items will be treated separately as usual.

"The rule changes will mean lower compliance costs, increased technical compliance and for some, less volatility of taxable income from year-to-year," Dunne stressed.

The amendments will be included in the next available tax bill. Draft legislation is likely to be released for comment in March, 2013.

TAGS: compliance | tax | business | accounting | tax authority | legislation | international financial reporting standards (IFRS) | New Zealand | financial reporting | standards

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