The Inland Revenue Department collects tax in accordance with several Acts including:-
- Income Tax Act
- GST Act
It also collects and distributes Child Support.
Sometimes you can “make a claim”, which is acceptable for one Act but not for another. e.g. The GST incurred in setting up a company can be claimed, but the cost is not tax deductible under the Income Tax Act.
These notes deal only with the Income Tax Act.
Inland Revenue Department
It sees its job as collecting tax; not giving it away. You will therefore find it reluctant to give advice on what you can claim.
What can I claim?
Apart from a few special rules, any cost necessary to run the business will probably be tax deductible. If you have “incurred” an expense you can claim it even though you may not yet have paid it. Some costs, providing future benefits like insurance, may not be fully claimable in the year incurred. Inland Revenue may not tell you how to run your business. If you want to run a Mercedes car, it is your choice. You cannot be told a cheaper car will do the same job. However, if the expense has a personal flavour about it, such as a couple going out to dinner and calling it a directors’ meeting, you will not be allowed to claim the cost. Some payments appear to be necessary for business but are deemed private. Here are a few examples:
- Travel from home to work and back
- The clothes you wear to work unless they are protective clothing like overalls for a painter and sneakers for a roofer. To qualify, the clothes have to be subject to undue wear and tear or of a specialised type – not normal apparel. For example work-boots, overalls.
- Socialising with mates in a pub
- Costs of getting into business like a lawyer’s bill and the cost of creating a limited liability company.
- Usually, the cost of taking your non working partner on an overseas business trip.
- The costs relating to installing new machinery, including travel to go and evaluate it.
- The debt repayment portion of hire purchase, finance lease or other loans.
These costs are either considered to be personal or costs to put you in a position to do business, as opposed to actually doing it. Expenses, which have an ongoing benefit to the business over a period of years, are “fixed (or non current) assets.” You can only claim a proportion of their cost each year, known as depreciation.
If you are unsure whether an expense can be claimed, do not ask Inland Revenue. They will take no responsibility if their staff makes a mistake. If you really want to tie Inland Revenue down you must seek a “Binding Ruling”. This may well cost you $10,000 or more.
Use of home
If you use part of your home for business IRD will accept a claim for a share of the costs:
- Interest on Mortgage
- Repairs and Maintenance
You could also claim for depreciation on the house but would probably have to add this back into your income when you sell. There are also claims for depreciation of carpet, furnishings etc in the room used for business but the cost of accounting for some of these expenses often exceeds the tax savings. Incidentally, if anyone says you must have a room set aside for business, tell them it is not true and to read the Castle case.
If the business uses the garage, include this as part of the area used for business. Substitute rent for rates etc if you do not own the house. Keep supplier tax invoices and you can also claim GST on the business share of these costs. If your business is a company, the bills will not be made out to it. In this case, claim reimbursement from the company because you are one of its employees.
Generally, where income is only interest and dividends, there is no claim for use of home to run your investments.
Unless you keep records to show the contrary, IRD allows you to claim half domestic phone rental for business if the phone is used for both private and business, so long as the business element is reasonably significant.
Full time farmers can claim 100% of telephone as business.
This is complicated. If you want full details, get a booklet from IRD. Roughly, if you supply food and drink reckon on only a 50% deduction.
Interest is generally tax deductible. However, be careful. LAQCs can be tricky. Borrowing to buy real estate can also be tricky.
- Borrowing to buy a new home and retain your old home for rental is not tax deductible even though you might use your old home as security for a mortgage.
- Revolving credit presents difficulties unless the property is owned by a company.
Don’t be tempted to pay yourself an expense allowance. IRD gets concerned not all of it will be spent on business costs. It prefers actual expenditure.
If your business is a limited liability company, an expense allowance may be permissible on the basis you are an employee of the company. You need to discuss this with us before you determine the amount of the allowance.
If you need cash for parking meters, keep a float in the car and draw cash to top it up from time to time as needed. Try to keep some evidence to show the money was really spent on parking. You can only do your best.
Pay as much as you can through your business bank account. For other small petty cash items, keep a notebook. Record date, nature of cost and amount. Keep supporting receipts where you can. When the business owes you a reasonable amount, get reimbursed from the business bank account and record this in your notebook.
How do I know when Inland Revenue has accepted a claim?
Provided you have not attempted to cheat and you have disclosed your income to IRD, the department has four to five years to reconsider your claims. So, near enough, you are usually safe from any mistakes after five years.