Skip to main content
Inland Revenue

Tax Policy

Notional interest under IFRS

(Clauses 38 and 55)

Summary of proposed amendment

In some situations International Financial Reporting Standards (IFRS) accounting rules require a special treatment for interest-free and reduced-interest loans. This can involve the recognition of a one-off adjustment to the value of the loan and notional payments (or receipts) of interest. These adjustments do not reflect actual payments made between parties, but rather are bookkeeping adjustments required for accounting purposes.

Proposed amendments to section EW 15D clarify that these bookkeeping adjustments do not have a tax effect. The amendment confirms that positive adjustments are not taxable and negative adjustments are not deductible.

The amendments will apply only to loans that begin with below market interest rates. The treatment of loans that subsequently pay below market interest (for example, because of movements in market interest rates) is unaffected. Loans that pay no explicit interest but involve increasing repayment amounts as a substitute for interest (for example, deep-discount bonds) are also unaffected.

Under the financial arrangement rules any deduction for notional expenses and any notional income returned will be reversed when a loan terminates. However, a loan may not terminate for some time. As such, proposed new section EZ 64 is a transitional provision that requires a taxpayer who has been claiming deductions for notional adjustments (or paying tax on them) to perform a change of spreading method adjustment in their 2014–15 income year. This proposed section brings forward any reversal.

Application date

The proposed changes will apply from the beginning of the 2013–14 income year.