Timing of base price adjustment (BPA) when changing from fair value method to another method

2011 amendment of section EW 29(13) of the Income Tax Act 2007 clarifies when a base price adjustment is calculated.

Section EW 29(13) of the Income Tax Act 2007; and sections EW48(1)(b) and (2) of the Income Tax Act 2004

Section EW 29(13) has been amended to clarify when a base price adjustment is calculated.

Key features

When taxpayers change from the fair value method to another spreading method as allowed in the Act they are required to perform a base price adjustment (BPA) rather than a change of spreading method adjustment. The Act provided that the BPA is to be performed at the "date of a change for the financial arrangement". The application of the timing of this BPA has caused some confusion amongst taxpayers and the change clarifies when this BPA calculation is to be applied.

The change provides that the BPA is performed "for the first income year for which a changed method is used for the financial arrangement …". This means a taxpayer will calculate the BPA as at the end of the year of change to the new method so that in the year of change the only income or expenditure under the financial arrangement is from the BPA calculation. The BPA cannot be performed in the previous year (the last year of using the fair value method) because the taxpayer is still using the fair value method for that year and the decision to use the new method is not effected until the year of change. The situation is the same as when a change of spreading method adjustment occurs ie the spreading method adjustment is the only income or expenditure for the financial arrangement in the year of change of method.

The consideration received/paid to be used for the BPA "deemed disposal/acquisition" is the fair value of the financial arrangement at the end of the year of change. For the following years the taxpayer calculates income and expenditure under the new method using the fair value used for the BPA deemed disposal/acquisition as consideration paid/received and for the ultimate BPA for that financial arrangement.

Application dates

The amendments apply retrospectively from the application dates of the original legislation.