Claiming Business Expenses

The Law on Deductions
Under the core provisions of the Income Tax Act 1994, a taxpayer must determine what their annual allowable deductions are for any income year when they calculate their income tax liability for that year.

Annual allowable deduction is the total of all the amounts of deductions which they have allocated to that income year. It means that the taxpayer has to understand what is required to determine whether an expense or a loss is an allowable deduction and also how the timing rules apply to that deduction.

Basically, a taxpayer’s income tax liability is calculated by deducting all allowable deductions from his or her gross income to arrive at the net income for that year. From that net income a deduction may be made for any net losses, to arrive at the year’s taxable income. It is on that taxable income that tax is levied.

The Test – Deductible or Not
The test of deductibility requires the expenditure to be either:

  • Incurred by a taxpayer in deriving their gross income.

  • Necessarily incurred by the taxpayer in the course of carrying on a business for the purpose of deriving income.

  • The expenses must not be of a private or capital nature, otherwise they are not deductible.

  • Any expenses that are partly business and partly non-business must be apportioned accordingly.

From an examination of the Acts, as well as relevant court cases, it would appear that it is not necessary for the taxpayer to show that the expenses were incurred for the purpose of gaining an income.

It is sufficient for the taxpayer to show that the expenses were incurred while producing the assessable income and that it was reasonably incidental and relevant to deriving it.

What Qualifies as a Business Expense?
You pay income tax on your net profit for the year. To work out your net profit, deduct your business expenses from your income for the year.

You can claim a wide range of expenses that you incur as a result of operating your business, provided you keep sufficient records of your purchases during the year.

Some commonly claimed expenses are:

  • Motor Vehicle Expenses - keep a logbook to record how much the motor vehicle is used for business purposes, and how much for non-business travel

  • Use of Home expenses - related to use of your home where you use it for business. You may claim a proportion of your rates, house insurance, power and mortgage interest, based on the proportion of the area in your home that is set aside for business

  • Rent - if you pay it for your business premises - you may also claim power, phone and other expenses for these premises

  • Supplies for the business – e.g, stationery and other office supplies, raw materials, stock purchases

  • Travel Expenses for business-related travel. Record your travel details in a diary and keep invoices and tickets

  • Premiums and Levies - for accident insurance and ACC cover

  • Gross Wages - to employees and fringe benefit tax if you pay these

  • Entertainment Expenses - for entertaining staff and clients. Some expenses are 100% deductible while others are 50% deductible.