Financial Arrangements Key Rules and the 1 April 2026 Changes
Tax & Compliance
Daran Nair
Director | CA, MBA
Financial Arrangements: Key Rules and the 1 April 2026 Changes
New Zealand's financial arrangement (FA) rules are a cornerstone of how income from loans, foreign currency and other financing instruments is taxed. From 1 April 2026, the regime has been simplified and made more generous for many individual investors and small businesses.
What Is a Financial Arrangement?
The FA rules sit in subpart EW of the Income Tax Act 2007 and are designed to tax the economic return on money-type arrangements over time, rather than simply taxing cash as it comes in or goes out. In broad terms, a financial arrangement exists where there is an obligation to pay or receive money, or money's worth, and at least some of that consideration is deferred.
Common examples include:
Loans, including home loans, foreign-currency mortgages and overdrafts
Term deposits and bonds
Foreign-currency bank accounts
Deferred payment or vendor-finance arrangements
The rules apply to both parties to the arrangement and largely ignore traditional capital/revenue distinctions for these instruments.
When a financial arrangement ends – for example, a loan is repaid or a deposit matures – a “base price adjustment” (BPA) is usually required to do a final tax wash-up.
Excepted Financial Arrangements – and the Recent Tweak
Not every transaction involving money is caught. The Act sets out “excepted financial arrangements” which fall outside subpart EW unless a taxpayer elects otherwise.
These include:
Ordinary shares in companies
Many private or domestic foreign-currency loans, for example a foreign-currency mortgage used solely to buy your own home
Certain variable-principal foreign-currency bank facilities
Most cryptoassets that are not economically equivalent to debt
From the 2025–26 income year, a helpful change applies to variable-principal foreign-currency debt instruments, such as everyday foreign-currency overdrafts. The threshold for treating these as excepted financial arrangements has been increased, meaning more small, day-to-day foreign-currency facilities can now fall outside the FA rules. In practice, this reduces compliance for individuals and small businesses with modest foreign-currency overdrafts.
Cash Basis vs Accrual Basis – What Has Changed?
The default position under the FA rules is accruals: income and expenditure, including foreign-exchange movements, are spread over the life of the arrangement using one of the permitted methods. However, there is a key concession for smaller investors and borrowers – being a “cash-basis person.”
Old Thresholds vs New Thresholds
Historically, there were three separate tests:
Income/expenditure threshold: Up to $100,000 a year
Assets/liabilities threshold: Total financial arrangement assets and liabilities under $1,000,000
Deferral/difference threshold: The extra amount of income that would arise on an accrual basis, compared with cash basis, had to be under $40,000
For the 2025–26 income year, those monetary limits were increased to:
Income/expenditure: Up to $200,000 on an accrual basis
Total face value of all financial arrangement assets and liabilities: Less than $2,000,000
Deferral/difference: Less than $100,000
From 1 April 2026, the rules are simplified again by removing the deferral/difference test altogether. A person will generally qualify as a cash-basis person if, broadly:
Total income and expenditure from all financial arrangements on an accrual basis for the year would be less than $200,000.
The total face value of all their financial arrangement assets and liabilities is less than $2,000,000.
There is no longer a separate requirement to measure and cap the “deferral” between cash-basis and accrual-basis income.
At a Glance – Old vs New
Test | Old Settings (Pre-2025–26) | 2025–26 Year | From 1 April 2026 |
|---|---|---|---|
Income/expenditure | ≤ $100,000 | ≤ $200,000 | ≤ $200,000 |
Assets/liabilities | ≤ $1,000,000 | ≤ $2,000,000 | ≤ $2,000,000 |
Deferral/difference | ≤ $40,000 | ≤ $100,000 | Removed completely |
Variable-principal FX EFA | Lower overdraft threshold | Higher threshold | Higher threshold retained |
In practice, this means it is now easier to qualify as a cash-basis person: the monetary limits are higher, and there is no longer a separate, technical deferral test. More “ordinary” taxpayers with modest foreign mortgages, foreign-currency bank accounts and simple term deposits can use the simpler cash-basis approach.
Practical Examples – How the New Rules Differ
Example 1: Foreign-Currency Mortgage on a Rental Property
Scenario
A New Zealand resident owns a rental apartment in Australia.
They have an AUD $700,000 mortgage with 20-year principal and interest repayments.
The loan is used wholly for the rental, so interest is deductible.
Under the old rules
The loan is a financial arrangement.
If the person's total FA balances and income were high enough, they might fail one of the cash-basis tests, particularly the deferral test.
As a non-cash-basis person, they had to calculate foreign-exchange gains and losses on the outstanding principal every year and return those in their tax return.
When the loan was finally repaid or refinanced, they also had to do a BPA to wash up all principal, interest and FX movements.
Under the new rules
The same loan remains a financial arrangement; that has not changed.
With the higher thresholds and no deferral test, many individuals with one or two foreign mortgages will now fall within the cash-basis rules.
As a cash-basis person, they can generally:
Return interest as it is paid.
Recognise FX gains and losses on the loan only when they are realised, for example when the loan is repaid or significantly restructured, via the BPA.
The tax outcome over the life of the loan may be similar, but the timing and complexity are very different: the new rules push more ordinary borrowers into the simpler, realised-basis approach.
Example 2: Foreign-Currency Bank Account
Scenario
You hold USD $50,000 in a foreign-currency account.
At the start of the year, 1 USD = $1.60 NZD, making the account worth $80,000.
At year-end, 1 USD = $1.80 NZD, making the account worth $90,000.
Under the old rules
If you were above one of the thresholds, including the deferral test, you were a non-cash-basis person.
You had to recognise a $10,000 foreign-exchange gain for the year in your New Zealand tax return.
When you eventually closed the account, you had to perform a BPA to bring in any remaining FX movement and interest.
Under the new rules
With the higher thresholds and no deferral test, many people with a single USD account and modest other arrangements will qualify as cash-basis persons.
As a cash-basis person, you would:
Return interest as it is credited, converted to NZD.
Ignore the unrealised $10,000 FX gain for now.
When you eventually close the USD account, you perform a BPA to capture the total FX gain or loss and any remaining interest.
Under the new rules, more taxpayers can ignore FX movements year-by-year and instead deal with them once, in a final BPA when the account is closed.
Example 3: Term Deposit and Overseas Loan
Scenario
You have a $500,000 NZD term deposit with a New Zealand bank.
You also have a $500,000 equivalent foreign-currency mortgage on a rental property overseas.
Under the old rules
The term deposit and the mortgage are both financial arrangements.
For the cash-basis tests, you looked at the gross amounts – you could not offset the deposit against the mortgage just because your “net” position was nil.
If the gross balances and associated income pushed you over the thresholds, especially the $1,000,000 balance and $40,000 deferral limits, you were forced into accrual accounting and annual FX calculations.
Under the new rules
You still test the gross amounts, but the balance threshold has increased to $2,000,000 and the deferral test has been removed.
Many people with this type of “matched” deposit and loan structure will now be under both the $200,000 income and $2,000,000 balance thresholds.
They can therefore usually remain cash-basis persons, accounting for the term deposit interest as received and the mortgage interest as paid, and handling FX movements on the foreign loan only when it is repaid via a BPA.
Again, the facts are the same, but under the new rules more people in this position qualify for the cash-basis concession and avoid complex, annual accrual calculations.
Example 4: Vendor-Finance on Business Assets
Scenario
You buy plant for $500,000, paying $200,000 up front and $300,000 in three years' time with no stated interest.
Under both the old and new rules
The deferred $300,000 is treated as a financial arrangement with deemed interest.
The FA rules separate the interest component from the purchase price.
The deemed cash price feeds into depreciation, and a BPA is required when the deferred amount is paid.
Where the new rules matter is in who must use accrual spreading methods. Under the old thresholds, a taxpayer with several such vendor-finance deals could be forced into accrual spreading for the interest component. Under the new thresholds and without the deferral test, more taxpayers will qualify as cash-basis persons and simply recognise the interest as they pay the instalments, with a final BPA at the end of the arrangement.
Transitional Residents and Financial Arrangements
Transitional tax residents sit in a slightly different position under the FA rules because much of their foreign-sourced FA income is temporarily exempt, but New Zealand-sourced FA income is not.
A transitional resident is a new or returning New Zealander who becomes NZ tax resident after at least 10 years of non-residence and qualifies for a temporary tax exemption on most types of foreign-sourced passive income, including overseas interest, dividends, rental income and accrual income from foreign financial arrangements.
For the duration of the exemption period, generally 48 months from when NZ tax residence starts:
Foreign-sourced FA income: Interest and FX gains on overseas bank accounts, foreign mortgages and other foreign financial arrangements are usually exempt and do not need to be returned in New Zealand.
New Zealand-sourced FA income: Interest on NZ term deposits or NZD loans remains fully taxable and subject to the normal FA rules, including cash-basis vs accrual treatment and BPAs.
In practical terms, transitional residents should use the four-year window to:
Map out all foreign financial arrangements, including overseas mortgages, bank accounts and portfolios, and understand how they will be taxed after the exemption ends.
Decide whether to restructure, repay or refinance certain foreign-currency loans or large foreign-currency balances before they become fully subject to New Zealand's FA and foreign-investment regimes.
The Base Price Adjustment (BPA) – Unchanged but More Often “End-Only”
The BPA is still the final wash-up calculation required when a financial arrangement ends. It compares all amounts received, including principal, interest, fees and previously taxed income, with all amounts paid, including principal, interest, fees and previously deducted expenditure. A positive result is income; a negative result is generally deductible.
The April 2026 law changes do not alter how the BPA itself works. What has changed is that, for those who now qualify as cash-basis persons, more of the FA income and expenditure is recognised on a simple cash or realised basis during the life of the arrangement. The BPA becomes the main point at which foreign-exchange movements and any final differences are brought to account.
Practical Tips After 1 April 2026
For individuals and smaller investors, the updated landscape suggests a few practical steps:
Identify your financial arrangements: Foreign mortgages, foreign-currency bank accounts, term deposits, bonds and deferred settlements are all candidates.
Test the updated thresholds each year: Check your total FA income/expenditure and the total face value of FA assets and liabilities against the $200,000 and $2,000,000 limits.
Understand cash-basis vs accrual: Cash-basis treatment generally means less annual complexity but potentially larger one-off gains or losses when arrangements end.
Keep good records: Opening and closing balances, interest schedules, exchange rates and contract terms are critical for getting the BPA right.
Seek advice for larger or complex positions: This is particularly important if you are a transitional resident or have multiple currencies and regimes, such as the foreign investment fund or controlled foreign company rules, interacting with the FA rules.
How We Can Help
If you hold overseas investments, foreign-currency loans or other financial arrangements and are unsure how the new rules apply to you after 1 April 2026, we can review your position, explain the implications in plain language and help you structure things to avoid unpleasant surprises.
Contact Greenlane CA Limited
Email: info@glca.co.nz
Phone: +64 9 522 5182
Website: www.glca.co.nz
Address: 97 Great South Road, Greenlane, Auckland 1051
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