Understanding how prepayments are treated under New Zealand tax legislation is crucial for ensuring compliance and maximizing allowable deductions.
Key Legislative References
Income Tax Act 2007
Part C - Income, Subpart CH - Adjustments
Covers matching rules for revenue account property, prepayments, and deferred payments.
Part E - Timing and Quantifying Rules, Subpart EA
Specifies rules for matching revenue account property, prepayments, and deferred payments.
Section CH 2 - Adjustment for Prepayments
References Section EA 3 (Prepayments), which outlines the treatment of unexpired portions of prepayments.
Section EA 3 - Prepayments
States that the unexpired portion of a prepayment is treated as income in the current year, with a deduction allowed in the subsequent year.
Tax Administration Act 1994
Section 91AAC - Exemptions from Section EA 3 of ITA 2007
Grants the Commissioner the authority to determine whether a prepayment can be treated as deductible in the current income year, based on factors such as expenditure nature, activity size, and materiality of the difference.
Determination E12
Provides criteria for excusing certain persons from complying with Section EA 3 of ITA 2007.
Specifies circumstances where prepayments do not need to be treated as income, allowing full deduction in the current income year.
Examples of Deductible Prepayments (from Determination E12)
Insurance Premiums: Expenditure up to $12,000 with an expiry date within 12 months of the balance date.
Local Government Rates: No maximum amount; fully deductible.
Links