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Prepayments and insurance

February 21, 2024

A prepayment is the portion of an expense relating to the following tax year. 

For example, rent of premises is usually paid in advance. This would mean if your lease requires you to pay the rent on the 20th of each month and you have a March balance date, your 20 March payment would include rent for 1 April to 19 April, which falls in the next financial year. This latter portion of the rent does not relate to deriving income to 31 March so logically it should not be claimable. 

  Inland Revenue recognises it would give everybody a lot of work if they had to adjust for all prepaid expenses like these no matter how small the amount or what length of time the prepayment relates to. Determination E12 provides some relief here. This sets out the prepaid expenses for which you do not need to adjust for tax purposes, provided you do not treat them as prepayments in your financial statements. For leases, you don’t have to adjust where the prepaid portion is no more than one month. 

Another of these expenses is insurance. The amount in the Determination is $12,000 of premium for any contract. So if your premium is less than $12,000 and you have paid it before the end of the financial year, you don’t have to adjust for the prepaid portion. Premiums have risen in recent years, so you might find you’re now paying more than this. If so, you should adjust the expense claim, effectively taking the prepaid portion as a deduction into the next year. You would need to tell us about this. Note Inland Revenue requires the adjustment for each contract as opposed to each policy.

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