What are financial arrangements rules?
An often unrecognised consideration in many transactions are the financial arrangements rules. These rules apply to any transaction where a person receives money in consideration for money to be provided in the future, with the premise being there would usually be an income/expense component to any arrangement.
Although there is no revenue/capital distinction in financial arrangements, there are many exceptions to the rules, where certain types of transactions have been excluded. These include such things as insurance contracts, non-finance leases, share purchases, and private property purchases.
When are financial arrangements rules taxes charged?
The financial arrangements rules ensure income or loss is allocated in the year it is earned as opposed to being accrued at the end of an arrangement.
In the year of the end of any financial arrangement a ‘base price adjustment’ is required to record any income or loss. This is essentially a washup of all income and expenses throughout the term of the arrangement.
Who financial arrangements rules affect
Anyone entering into a financial arrangement providing it’s not on the excepted list.
An example of financial arrangements rules tax in use
- An overseas bank account
- An overseas mortgage – you must use the FAR to spread the cost of the financial arrangement through the term of the arrangement.
- Overseas bond holdings – you must use FAR to calculate the income from purchasing bonds.
Ways people get financial arrangements rules wrong
- When you own overseas bonds you think that the income received at the bond maturity is only reportable in the year of the maturity, but it requires reporting throughout the term of the bond.
- If you are transacting on a cash basis there are detailed rules such as not having to report financial arrangements if the net sum is less than NZ$1 million. There are other rules which also apply.
Recent changes to financial arrangements rules
No recent changes