The following are comments on specific items of cost that while (perhaps) being deductible, bring with them questions about the quantum, timing and efficacy of a deduction in some situations:
Accident Compensation Levies: The timing of the deduction is based on when the levy is due and payable and not necessarily with reference to the year to which the levy relates.
Advertising and Sponsorship: Sponsorship incurred, where the business owner receives some personal benefit from that expenditure, is likely to be considered private (for example, sponsorship of a stockcar car of which the taxpayer is the driver, although if this personal involvement was incidental to the company’s predominant objective of expansion of its business, the expenditure could still be deductible).
Computer Software: Expenditure on computer software which creates an asset can be expected to be of a capital nature and subject to the depreciation regime. Developing (but not maintaining) a website is capital expenditure.
Depreciation: Capital assets that have been purchased in earlier years (where the cost has not been tax deducted in that year of purchase), can be depreciated in each year of its useful life at a rate of depreciation that has been determined by IRD according to the type of fixed assets. However, from the 2012 tax year, a taxpayer can no longer claim a depreciation deduction for a building (one that is deemed to have an estimated life in excess of 50 years at the time it was built). Building fit-outs will continue to be depreciable for commercial buildings, including in situations where none has been separated out in the past, a deemed fit-out value being 15% of the building book value at the previous balance date. Fit-out claims do not apply to properties held for residential renting. Depreciation can still be claimed on plant, equipment and fittings associated with the building (but which are not an integral part of it).
Education: An employer can deduct costs associated with updating the working knowledge of themselves and their employees. An individual’s costs associated with gaining a qualification before commencing self-employment is likely to be non-deductible.
Employee Remuneration: Payments of employee remuneration can be expected to be allowed as a deduction. Some remuneration paid will have to be capitalised where the employee has been engaged in the construction or installation of a capital asset.
Entertainment: Generally, the deduction allowed for expenditure on entertainment is 50% of the amount incurred. Expenses incurred while travelling on business, while at conferences and education courses, and for staff tea facilities, are fully deductible. There are however some specific detailed rules in this area that need to be considered when determining the deductibility of any given expenditure.
Feasibility Expenditure: Feasibility expenditure is often incurred at the early stages of considering a new business venture and is generally not deductible. If however it is incurred as part of an existing and ongoing business activity it is likely to have the necessary nexus with the income earning process and therefore be deductible.
Financial Planning Fees: A deduction may be allowed for a fee paid to a financial adviser to review existing investments and make appropriate recommendations. Costs associated with setting up of an initial investment portfolio are not likely to be deductible.
Fines: The conventional view is that a deduction is not allowed for a fine for reasons of public policy.
Franchise Fees: These are capital in nature but if a franchise has a fixed life the cost may be claimed by way of depreciation.
Goodwill: Generally, goodwill is a capital asset and consequently is non-deductible. However, a payment made to preserve goodwill may be deductible. Although not goodwill, a premium paid upon the grant of the right to use land is likely to be depreciable intangible property and capable of deduction by way of a depreciation-type charge.
Home Office Expenses: A taxpayer who uses their home for business purposes is entitled to a deduction in relation to that part of the outgoings which relate to the use of the home for the work-related activities (heat, light, rates, insurance, interest on mortgage, repairs and maintenance and depreciation). The portion is based on the area of the office relative to area of the home.
Insurance: The payment of business related insurance premiums (re stock, plant, liability, loss of income etc) is likely to be deductible. Personal and life insurance payments (including accident sickness policies) re owners and employees are not likely to be deductible. Insurance required as collateral security for loans may be deductible when the loan is used for business purposes.
Interest: A deduction is generally allowed for expenditure incurred in borrowing money used as capital in deriving assessable income. In any given situation, it may be necessary to determine an apportionment between business and private purposes.
Investment Losses: A deduction is likely for a loss suffered upon the disposal of an investment (including property) only where they are held on revenue account (that is, where the investment was acquired, and is held, for the purpose of resale).
Holiday Pay: The amount owing at balance date is deductible to the extent that individual employee amounts are paid within 63 days of the balance date.
Library: The initial cost in setting up a library and the purchase of new volumes has to be capitalised while the cost of maintaining that library is likely to be deductible.
Legal or Accounting Fees: To be deductible, the actual costs incurred must have a nexus with the earning of assessable income and are not otherwise capital or private in nature. There are many specific rules relating to the deduction of legal fees and due consideration needs to be given to each cost incurred to determine its deductibility.
A new provision to make the determination of deductibility somewhat simpler was introduced effective from 1 April 2009, whereby legal fees up to a total of $10,000 pa are deductible in full regardless of whether the expenditure is on revenue or capital account. Previously (and now for all legal expenditure where the total exceeds $10,000 pa) expenditure on account of capital matters was non-deductible and generally had to be treated as part of the capital cost.
Motor Vehicle Expenses: The deductibility of vehicle expenses can be a whole subject on its own. Generally for companies and for all employees, costs are deductible in full but for those vehicles that are available for private use (including utility type vehicles) FBT is likely to be payable by the employer. For self employed persons (such as partners and sole traders), expenses can be claimed using one of the following methods:
applying the proportion of business usage compared with the total usage to the total costs of running (petrol, oil, registrations, services, maintenance and depreciation). This normally requires the use of a log book for a representative 3 month period once every 3 years. In general, travel from home to work and back is considered private travel.
25% of total expenses in the absence of the use of a log book (although in certain factual circumstances, even a 25% could be determined to be too high).
Use of IRD approved mileage rates (there is a maximum of 5,000 kilometres per year that can be claimed using this method).
Patents: Costs incurred in the creation or purchase of a patent can be depreciated over their legal life (normally a maximum of 20 year). Costs associated with an unsuccessful patent are deductible.
Repairs and Maintenance: Expenditure on the repairs and maintenance of an asset can be expected to be allowed as a deduction. This is provided that the expenditure can be regarded as repairs and maintenance, and not improvements. Repairs involve the replacement or renewal of a worn out or dilapidated part of an asset but not of the whole asset. IRD has made the following comments about repairs and maintenance:
Expenditure required to maintain an asset in the condition it was in when the taxpayer acquired it is on revenue account and therefore deductible.
The replacement of a capital asset is capital expenditure.
A distinct physical unit which can function on its own is a unit against which the extent of any expenditure will be measured.
Expenditure on an asset over and above making good wear and tear (and in effect, making improvements) is capital expenditure.
The practice of IRD is not to make any allowance for notional repairs. Any such expenditure is considered as a whole and its deductibility is determined by whether it adds to the capital value of the asset.
The cost of repairs will not be deductible if it is incurred before the process of income derivation has begun or if it is incurred after the process of income derivation has ceased.
Repairing of Recently Acquired Asset: In some cases a deduction may be allowed for the cost of repairing an asset soon after its acquisition. When repair expenditure occurs at more or less recurring intervals it is deductible as repairs, even though some of it may relate to use of the asset by the previous owner. However, when the previous owner of a recently acquired asset has allowed it to deteriorate below an acceptable standard for an operating unit, the more substantial “dilapidation” repairs necessary to place the asset in an income-earning condition in most cases result in an increase in the value of the asset. Therefore, their cost would not be deductible. When the dilapidation expenditure occurs immediately following acquisition of an asset, the expenditure is unlikely to be deductible.
Spouse /Partner Payments: No deduction is allowed for a payment in the form of remuneration unless approved by the Commissioner before the deduction is claimed. Before approving the deduction, the Commissioner must be satisfied that the payment is for services rendered, is for genuine business purposes (and not for domestic services performed in connection with the home). These rules do not apply where the spouse / partner is an integral co-owner of the business although issues can arise where IRD could consider that excessive remuneration may have been paid.
Subscriptions: Genuine business related subscriptions are deductible but those related to the likes of golf-club membership are personal in nature and therefore unlikely to be deductible.
Superannuation and KiwiSaver Contributions: An employer is allowed a deduction for employer contributions to a superannuation or KiwiSaver scheme for employees although there are certain rules about expenditure on superannuation costs.
Telephone and Tolls (Home): Actual business toll calls incurred in income-earning activities are deductible, as is a portion of the telephone rental (normally 50% of the rental cost).
Travel Expenses: Travelling expenses incurred in the course of earning assessable income are deductible. Overseas travel (and associated) costs can however be an altogether different matter. There has to be a very close association with the incurring of such costs in the course of the taxpayers business and its income earning process. Incidental business purpose is unlikely to enable a claim to be made for the full costs incurred. If overseas travel costs are to be claimed, a full history of the trip and its business related purpose needs to be documented so that a claim can be supported if called upon by IRD. Private adjustments will be required for any holiday element of the trip. As is usual in such cases, the particular purposes and circumstances of the trip need to be considered before a full determination of deduction can be made.