The following deductible items are mentioned under ITA 2007.
Motor Vehicle expenses
Generally motor vehicle expenses are deductible if they are related to business. The expenses include depreciation, fuel, repairs, maintenance (Includes tyres, parts, cleaning and so on), insurance, WOF, registration fees, road user charges, and parking.
If a motor vehicle is partly used for private, only business relative expense is deductible. If it is a company vehicle, the private use is subject to fringe benefit tax. There are several methods to determine the business use portion:
1) Actual expenditure (DE2)
2) A logbook (DE6-DE11): Every time the taxpayer uses the vehicle, he makes a record on the logbook. And after 90 days he can work out the average proportion of business use to private use of the vehicle.
3) Mileage rate (DE12): If a taxpayer’s business travel is below 5,000 km per year, he can calculate the vehicle expense by multiplying the distance travelled by 77 cents.
4) Default method: If insufficient record has been made, the deduction is limited to the lesser of either: the proportion of actual business use or 25% of total use of the vehicle.
Notice, if there are no records that can be used to establish actual business use, no deduction will be allowed.
Research and development (DB34)
Research is an original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding (NZ IAS 38).
Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use (NZ IAS 38).
DB34 overrides capital limitation DA2 (1). A taxpayer can claim deduction on research and development expenditure if he treats the amount as an expense by applying Financial Reporting Standard NZ IAS-38: intangible assets. Under NZ IAS-38, expenditure on research is written off; while expenditure on development is written off until the expenditure has met five criteria outlined in IAS-38 and become an intangible asset. Then the further expenditure is capitalised and amortised. The five criteria are as follows:
1) The product or process is clearly defined and the costs attributable to the product or process can be identified separately and measured reliably;
2) The technical feasibility of the product or process can be demonstrated;
3) The entity intends to produce and market, or use, the product or process;
4) The existence of a market for the product or process or its usefulness to the entity, if it is to be used internally, can be demonstrated;
5) Adequate resources exist, or their availability can be demonstrated to complete the project and market or use the product or process.
A taxpayer is allowed a deduction for interest incurred if the money borrowed is used to derive income (DB6).
A deduction is allowed for expenditure (eg bank charges, legal costs) incurred in borrowing money if the money borrowed is used to derive income(DB5). DB 5 also permits a deduction for expenditure incurred in obtaining a lease of a property.
The following expenses are normally deductible under DB5 in borrowing money:
• Legal fees; bank fees and charges; valuation costs if required by the lender for security purposes; cost of registering mortgage; guarantee fees; survey fees; stamp duty; broker’s commission; cost of arranging bank overdrafts; loan procurement fees.
• Expenses incurred by a company in raising money from the issue of debentures. The deductibility of expense in the renewal of debentures would depend on whether the expense was strictly an expense incurred in borrowing money.
• The payment of approved issuer levy.
Goods and services tax (DB2)
Section DB2 only outlines general approach. It should be read in conjunction with CH5(2), EE47(1)-(8) and EE54(1)-(4).
It divides the situation into two:
1) Registered taxpayers:
i. Any input and output GST is excluded from that taxpayer’s income.
ii. Any paid and refunded GST to/from IRD is excluded from that taxpayer’s income.
iii. Depreciation is calculated on the GST exclusive cost of the asset.
2) Unregistered taxpayers:
i. A taxpayer is not required to charge GST on goods and services he provided, so GST has no impacts on his income.
ii. GST charged on registered supplies is deductible; because the taxpayer cannot claim an input tax deduction for GST, the GST is his ‘real’ cost.
iii. Depreciation is calculated on the GST inclusive cost of the asset.
iv. Trading stock is valued using the GST inclusive cost of the stock.
Bad debts (DB31)
A taxpayer is not allowed for a deduction in an income year for a bad debt except to the extent to which:
i. The debt is written off as bad in that year.
ii. If the debt is an mount owing under a financial arrangement and the accrual rules apply to the taxpayer, a deduction is allowed under either DB31(2) or DB31(4).
iii. The debt is not a loss of capital.
Some related issues:
1) How to define a bad debt:
i. Length of time a debt is outstanding. The longer a debt is outstanding, the more likely it is a bad debt.
ii. Efforts taken to collect the debt. The greater effect a creditor has tried to collect the debt, the more likely it is a bad debt.
iii. Other information obtained by a creditor. A creditor may obtain particular information about a debtor that would lead to a bad debt conclusion. For example, the information about the debtor’s financial difficulties.
2) Bad debt recovered:
If a bad debt is repaid, the amount received is included in the creditor’s income, in the income year the bad debt is repaid.
3) Timing of written off:
There is no requirement that a debt should be written off in the year it turned bad. It can be written off in the subsequent year.
Computer software and website expenditure
Unsuccessful software cost deduction is permitted under section DB40B. A person must be able to show that expense satisfies general deduction criteria. If the development has been completed, the software becomes an intangible asset, and is subject to amortisation. The deduction is available in the similar year when the software is abandoned.
Advertising expenses are generally deductible in the income year when they are incurred. However some advertising expenditure is prepayment. In accounting practises, the prepayment is added back to the taxpayers’ income for that year and then be deductible in the subsequent year. E12 provides a concession permitting a deduction for prepaid advertising expenditure in the income year it is incurred if the total advertising cost is less than $12,000 and the expenditure will have expired within six months after balance date. However, if the expenditure is treated as prepayment for financial reporting purpose, the concession does not apply.
However, the cost of hoarding and permanent signs is not deductible. It should be capitalised and depreciated; but the cost of repairs and maintenance of those signs are deductible.
Generally speaking, as long as the advertising expense is related to deriving income, a deduction is allowed (TRA Case P16 (1992)).
Depreciation is deductible if the related assets are used for deriving income (DA1). Refer to Article Depreciation. It should be noticed the deduction is restricted by private limitation (DA2). The depreciation is not deductible if the asset is for private use.
Education is deductible if it is related to income deriving. It should be noticed the deduction is restricted by employment limitation (DA2). For example, an employee incurred education expense in deriving his employment income is not deductible. But this education expense is deductible for his employer if his employer paid for him.
Notice, an income-earning activity must exist in order to claim the education fees. Refer to TRA case Q18 (1993).
Fine, Penalties and Damages
Fines and penalties are not deductible under any circumstances.
An award of ordinary damage is not a fine or penalty. Payment for ordinary damage is deductible, provided that the statutory nexus test in DA1 is satisfied. To meet the nexus test, a taxpayer has to prove that the cause of damage is a normal and ordinary risk related to business’ operation.
If the payment is exemplary damage, the damage is not deductible.
Home office expense
Some home office expenses are allowed for deduction providing they are related to income deriving activities.
The typical deductible home office expenses include rates, electricity, heating, fuel, insurance (house and contents) and repairs and maintenance. Some capital items like equipment and furniture, if they are related to income deriving, their depreciations are deductible. Also, some portion of mortgage and interests is deductible.
The general accepted method of determining the deductible portion of the outgoings and depreciation is based on the floor area used for work activities divided by total floor area of home.
Generally legal expenses are deductible providing DA1 and DA2 are met. There is also specific provisions permit legal expenses deduction related to:
• Borrowing money used as capital in deriving income (DB5)
• Preparing and registering, or renewing a lease of property (DB18)
• The grant, maintenance or extension of a patent (DB37)
• Cost in challenging an tax assessment
• Changes to constitution of companies and costs of appointing company directors and legal advisers
• Breach of contract, where a trader defends an action for breach of contract arising out of the sale of goods. (Nicholas Nathan Ltd v Commissioner of Inland Revenue 1989)
According to DB62, up to $10,000 per annum of business related legal expenses can be fully deducted without the need to distinguish between revenue and capital.
Below are some examples of not deductible legal expenses:
• Acquiring and disposing of capital assets like a rental property. However for a construction company, a property is a revenue item for them, so the legal fee of disposing property is deductible.
• Forming, registering or liquidating a company.
• Increasing, reducing or altering the capital structure of an entity.
• Legal expenses incurred in the sale of a business except the cost of valuing trading stock.
Low value assets
Taxpayers can claim a deduction for the cost of asset acquired for $500 or less in the year of acquisition provided that the asset is used for deriving income.
Generally remuneration paid to employee is deductible to employer provided that the general permission (DA1) is satisfied.
Repairs and Maintenance
Generally repairs and maintenance is deductible provided that the general permission is satisfied.
The definition of repairs and maintenance is not provided in ITA 2007, so cases are used in order to define the characteristics. Derived from Auckland Gas Company Ltd v Commissioner of Inland Revenue (2003) case, there are two steps test to define the characteristics:
• Identification of the asset repaired
• Ascertain the extent of the work undertaken on that asset and determine whether the asset has been improved or whether it was merely confined to remedying wear and tear.
Generally speaking travel expenses are deductible provided that they are satisfied by DA1 and not restricted by DA2.
The follows are specific treatments:
1) Travel from home to work is not deductible because it is the activity before the income generation; unless :
• Travel where the taxpayer’s home;
• is a base of work
• is a base of operations (e.g. finish work at home and bring it to the clients)
• The taxpayer is carring tools from his home
• It is a travel between two places of work
2) Travel expense of a capital nature
• Where travel expenses are related to the purchasing of a new plant, a machine or other capital assets, the travel costs should be capitalised as part of the new capital assets and subject to depreciation.
• However, a deduction for travel cost will be permitted if the travel was to survey new machine or processes, to investigate the prospect of establishing a new branch.
3) Overseas travel
Overseas travel costs are deductible to the extent that they are incurred in deriving income or carrying on business. For example: An importer visited his parents in India. While in India he also negotiated his own business. During the 20 days he had spent 10 days in his business. He is entitled to 10/20 expenses deduction for the overseas travel. Notice, when business content is less than 50%, the deduction is calculated by adding every single day’s spending.
Company Administration Cost
|Company administration cost||Deductibility|
|Annual general meeting||Deductible|
|Dividends: allocation, payment and disputes over allocation||Not deductible: capital limitation applies|
|Listing fees||Not deductible: capital limitation applies|
|Share registry costs||Deductible unless in relation to mergers, acquisitions or migrations|
|Special meeting: Alteration of constitution||May be deductible in some situation (IRD v Carron Company(1968))|
|Special meeting: Alteration of shareholders’ rights||Generally not deductible|
|Special meeting: Arrangement with creditors||Deductible|
|Special meeting: Liquidation||Not deductible|
|Special meeting: Major transactions||Deductible|
|Statutory filing fees||Deductible|
A taxpayer who incurs expenditure on particular form of entertainment is only allowed a deduction of 50%, unless the particular form of entertainment is excluded.
1) The following forms of entertainment qualify for a 50% deduction (DD2):
• Corporate boxes: Sporting, cultural, or any other recreational events or activities occurring off the taxpayer’s business premises. This includes tickets to entry.
• Pleasure craft: Yacht or other pleasure craft.
• Holiday accommodation
• Entertainment off the premises: Food and drink provided by a taxpayer as entertainment off their “business premises (Defined in DD2, DD4-8, DD11)”.
• Entertainment on the premises: Food and drink provided by a taxpayer as entertainment on their business premises or in other premises which is reserved only for the taxpayers’ company.
2) The following forms of entertainment are excluded from the regime and can be fully deductible.
• Business travel expenditure: food or beverage consumed by a taxpayer in the course of employment related travel. (Deductible in terms of the business not for the empoyee)
• Conference expenditure: Food and beverage consumed at a conference, educational course or similar events which lasts at least four consecutive hours.
• Expenditure on employees’ meals:
o Light refreshment such as morning tea
o A light meal consumed by employees as part of their employment duties.
o Entertainment that is principally sponsored to advertise to the public the business, goods or service of a taxpayer.
o Expenditure on samples provided for promotion.
o Entertainment enjoyed outside New Zealand. For example, a New Zealand taxpayer taking a potential client out for dinner in Sydney.