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Chapter 1 - Introduction

1.1 Over the past few years some taxpayers and their advisers have raised concerns over the complexity of the rules governing agreements for the sale and purchase of property or services (referred to in this paper as “the agreement/s” or “these agreements”), especially when they are in a foreign currency. Further, there can be considerable volatility caused by some of the methods mandated for these agreements in Determination G29 that some taxpayers would regard as inappropriate. We accept that these concerns are valid.

1.2 Current tax law requires these agreements when they are in foreign currency to be considered as two separate components. The first component is taxed as a forward contract for foreign exchange (FEC) from the date the agreement is entered into until the date the first rights in the goods pass or the services are performed (the rights date).

1.3 It is this first component that is mainly causing concern.

1.4 The second component, if it exists, is an interest-bearing loan. These loans can result from both prepayments and deferred payments made under these agreements. The proposals in this paper about this component apply to agreements in New Zealand currency as well as foreign currencies.

1.5 This paper briefly outlines the policy settings for the current law and suggests some pragmatic changes to the rules which we consider should remedy these difficulties without introducing inappropriate tax-base effects. The paper is of necessity technical and presumes that readers are familiar with the relevant tax legislation and determinations.

Problem and suggested solutions

1.6 Our preferred solutions are:

  • IFRS GAAP treatment would be mandatory for taxation purposes for IFRS taxpayers. This includes the treatment of any designated hedge, any interest involved, the tax book value of the resultant “underlying” item and the “rights” date. This proposed IFRS GAAP treatment does not extend to any capitalisation of interest into the cost of the underlying item.
  • For non-IFRS taxpayers, the general rule to value the property or services would be the aggregate of the NZ$ amounts using actual spot rates at payment dates. There would be three exceptions:
    • for trading stock and consumables, FX amounts from hedges would be included in the value of the stock where they are included in the stock values in the taxpayer’s stock system;
    • for depreciable property, FX amounts from qualifying hedges would be included in the value of the property; and
    • interest would only be imputed into the agreements on a future value or discounted value basis in limited circumstances.

1.7 We suggest that the new rules be made effective for the 2011–12 income year for those taxpayers who wish to apply them to new agreements in that year. Otherwise taxpayers will apply the new rules to new agreements from the 2012–13 income year. The choice of application date will apply to all new agreements from the relevant income year.

1.8 We also suggest that the tax treatment for any existing agreements and associated hedges for past years where the methods used are either current or the proposed new alternatives be retrospectively validated. Existing agreements would continue to use those methods until they mature – that is, they will not be allowed to change to another current or new alternative method.

1.9 It is proposed that these agreements be dealt with by the rules included in primary legislation from the time the proposed amendments are made. Following consultation, any changes to the rules will be included in a future tax bill.

1.10 These proposals are detailed in the following chapters.


1.11 Submissions on this paper should be made by 17 August 2012 and can be addressed to:

Financial arrangements
C/- Deputy Commissioner
Policy Advice Division
Inland Revenue Department
P O Box 2198
Wellington 6140

Or email: [email protected] with “Financial arrangements” in the subject line.

1.12 Submissions may be the subject of a request under the Official Information Act 1982, which may result in their publication. The withholding of particular submissions on the grounds of privacy, or for any other reason, will be determined in accordance with that Act. Those making a submission who consider there is any part of it that should properly be withheld under the Act should clearly indicate this.