If I want to travel from Earlsfield (zone3) to Kew (also zone 3), going
via
Richmond (zone 4), I only ever touch in and out in zone 3 so I am not
paying for my brief time in zone 4. However I have done what is
expected of
me - touched in and out and carried enough prepay to cover my extension
ticket.

A colleague tells me that this is correct and that I am travelling
perfectly
legally - can anyone here confirm this?

Theoretically, no, it's not "legal", as prepay is not valid SWT - so it
won't cover you for the short distance between North Sheen and Richmond.
To travel that way, should buy a paper extension ticket for North Sheen
to Kew.

The Oystercard site can be a bit vague but seems to say when transferring
from the tube to rail / tram / DLR you are supposed to touch in at the
interchange station (that applies to all Oyster users, not just Pre-Pay). I
assume the reverse applies though it doesn't actually spell it out.

It also says if you are using National Rail services and expect to be able
to use your Pre-Pay as a ticket extension on participating services you have
to break your journey and touch in where you want the Pre-Pay usage to start
(I assume they are talking about a journey that doesn't start on a
participating service but again they don't spell it out).

However either way it suggests that you are supposed to touch in at Richmond
if you consider you are using Pre-Pay from there to Kew.