Debt securities, finance leases and hire purchase agreements denominated in New Zealand dollars
Determination G30 (30 Mar 2006) allows financial institutions that adopt IFRS to mostly continue the same methods of calculating income and expenditure.
Determination G30 allows financial institutions that adopt International Financial Reporting Standards (IFRS) to continue to use the same methods of calculating income and expenditure for most financial arrangements as under the previous rules – in particular, where income and expenditure from those financial arrangements were returned under the alternative method to yield to maturity.
The new Determination can apply where IFRS is used for financial reporting by persons in the business of lending money and to the holders of finance leases and hire purchase agreements. However, it does not apply to debt securities that are held or issued for dealing or liquidity purposes.
Where the new Determination applies, the pre-IFRS tax treatment of interest and principle payments can continue. Generally, that treatment was an alternative to the yield to maturity method under section EW 16 of the Income Tax Act 2004. However, a condition of adopting an alternative method was that the same method be used for both tax and financial accounting purposes. Following the adoption of IFRS, section EW 16 no longer sanctions use of the alternative method because the tax method would not be used by the taxpayer for financial accounting purposes. Determination G30 reinstates the status quo for interest and principle payments.
However, fee income and fee expenditure are recognised under the determination for tax purposes in the same manner as they are recognised under IFRS. Tax adjustments for impairment are not allowed.
The determination is intended to be a temporary measure to provide certainty of tax treatment while a legislative response to the introduction of IFRS is being developed.
The new Determination was published in the New Zealand Gazette on Thursday 30 March 2006 and may be applied to existing financial arrangements at that date and to new financial arrangements subsequently acquired.