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Employment limitation for income tax purpose

Section DA 2(4) ITA 07 states that a person is denied a deduction for an amount of expenditure or loss the extent to which it is incurred in deriving income from employment. This prevents wage and salary earner from deducting expenses relating to their employments. There are advantages and disadvantages of the employment limitation:


Advantages for employment limitation:

  • Increase taxes and revenue for government. This is because deductions are not allowed, so wage and salary earner still have to pay their tax.
  • Simplify the filing process. The PAYE system makes it easier for employer to deduct employee’s taxes at source. The employee does not have to file anything to the IRD.
  • Improve the certainty of the tax system. This is because wage and salary earn is taxed through PAYE system and no one can claim any deductions.
  • Prevent taxpayers from claiming wrong deductions with the purpose to reduce their tax.
  • IRD can maintain its current system as they do not need to increase the capacity for additional filings.

 

Disadvantages for employment limitation:

  • Reduce the fairness in the tax system. In order to claim deductions, individuals must be a contractor and sole trader. It is not fair for employee as they still have to incur expenses in relation to their employment (income earning activity). Examples for expense relating to employment could be professional membership, vehicle expenses etc. Normally, it is the employers’ responsibility to reimburse the employee
  • Other country (European Countries, Australia, UK, US Canada, Singapore and South Africa) allows employment deductions for employee.
  • Wage and salary earner have less income as they cannot claim deduction on their gross income.

 

Thus, the main reason is to have less workload for the IRD.

 

Disclaimer: The following answer necessarily sets out general principles only. The facts of particular cases always need to be considered carefully, and it may be necessary to obtain advice from a tax expert.

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New Zealand Tax Accountant.