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Purchases denominated in foreign currency – proposed tax reforms announced

Author: Iain Bradley & Annamaria Maclean

In our August 2012 Tax Alert we outlined and commented on the proposals included in an Officials’ Issues Paper on Financial Arrangements – the sale and purchase of property or services.  The proposals outlined in the issues paper were generally welcomed by taxpayers making purchases of goods and services in a foreign currency, given the complexity of the rules that currently apply in this area. 

Since then there has been progress on these proposals.  On 14 December 2012, the Minister of Revenue announced that the Government will move to simplify the rules in relation to financial arrangements that are agreements for the sale and purchase of property or services.

The Minister’s announcement confirms the following:

  • IFRS taxpayers will be required to follow their financial reporting treatment for almost all of their agreements for the sale and purchase of goods and services.  The exception will be for capital items, other than capital items that are depreciable.
  • Non-IFRS taxpayers will use a simplified version of the IFRS treatments.
  • The reforms will apply from the 2013-14 income year.  This is intended to cause minimal disruption and ensure that the rules do not affect provisional tax payments for current income years.  However, IFRS taxpayers will be able to elect to apply the IFRS accounting treatment to new arrangements from the 2011-12 income year.    The proposals suggest that such an election must be made for all new arrangements.
  • The tax treatment of any existing arrangements, associated hedges and the underlying property or services, for income years before IFRS taxpayers adopt the IFRS tax treatment, will be validated in certain circumstances.
  • Existing agreements will continue to use the tax treatment applied, before IFRS taxpayers adopt the IFRS treatment for new arrangements, until they mature.  That is, the tax treatment of existing arrangements will not be allowed to change to another current or new alternative method.  However, IFRS taxpayers will be able to elect that forward exchange contracts that are designated as hedges of the foreign exchange risks on existing arrangements can follow the IFRS accounting treatment for tax purposes, in certain circumstances.

 

The amendments to the tax legislation to give effect to these proposals will be included in the next available tax bill, with draft legislation expected to be released for comment in March 2013.

Comment
It appears that the intention of the Minister’s release is to assist those taxpayers filing their 2012 income tax returns due at the end of March 2013.  Some taxpayers may have already filed their 2012 income tax returns but others will be in the process of preparing and filing them now.  Therefore it is important that these proposals are considered before 2012 income tax returns are finalised.

There is no expected value method allowed under the proposals so some volatility of taxable income may still arise as a consequence of agreements for the sale and purchase of property or services and any associated hedging arrangements.

It is still not entirely clear what historic tax treatment of existing arrangements (including associated hedges and the underlying property or services) will be validated.  Taxpayers that have historically followed the IFRS accounting treatment or used spot exchange rates at payment and/or rights date, instead of applying Determination G29, should be fine.  Taxpayers that have tried to approximate a Determination G29 calculation should be fine (provided the result is not materially different from what Determination G29 would have calculated) but, depending on their tax treatment of any associated hedging, the current legislation may not support their historic treatment.  Other taxpayers that have historically taken a different approach to those referred to above may find they have some challenges if the Inland Revenue reviews their tax treatment.   Hopefully this will be further clarified when the draft tax legislation is released.  

It is not clear at this stage exactly what non-IFRS taxpayers will be required to do for tax purposes.  Again, hopefully this will be clarified when the draft tax legislation is released.   As we noted in the August 2012 Tax Alert article, we understand that the requirement for entities to prepare IFRS accounts is being relaxed and therefore more taxpayers may be in the “non-IFRS” camp in the near future.

As always the devil will be in the detail and we will provide a further update on this issue once the draft legislation has been released.   

In the meantime until the legislation is released, if you enter into foreign denominated agreements for sale and purchase of property or services then you should contact your usual Deloitte advisor to determine how the proposals will impact you.


Tax Alert February 2013 contents

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