Sasha Borissenko: What you can and can’t claim as business expenses

OPINION:

As we enter a new financial year, I decided to broaden my horizons and commit to learning about the exciting world of taxes.

My previous approach – “see no evil, hear no evil” – meant I’ve been at the complete mercy of my accountant and we all know ignorance of the law – in this case the tax vortex – is no excuse. And so in preparation for this column I have realised that had I done my research 10 years ago I could have a holiday home as well as three rental properties by now.

I shouldn’t jest. But to quote Diplock LJ: “there are few greater stimuli to human ingenuity than the prospect of avoiding fiscal liability”.

Enter the elusive area of tax deductibility – or business expenses, as they’re commonly known.

There is no list, as such – to my dismay – but there’s significant legislation and legal precedent. Cue the Income Tax Act 2007.

The legislation is extraordinarily long and seeing as “expenses” is referred to 58 times throughout the Act it’s of little surprise that people find themselves at a loss – and by people, I mean me.

Non deductibles

We know that late filing and late payment penalties imposed by the IRD; costs relating to breaking the law; insurance premiums relating to personal sickness; and the principal portion of loan repayments can’t be written off.

What I didn’t know is that clothing – unless it’s entirely specific to an occupation such as a hi-vis vest – can’t be written off. As a newfound contractor, this left me particularly upset seeing as I had to upscale my wardrobe from my Covid-19 sweatpants and generally crummy newsroom attire.

What’s more, while I need prescription glasses for work-related business use, these also can’t be written off. The more I look into the area, anything that can have a personal benefit – in my case wearing glasses in a bid to look more intelligent in a social setting – will not meet the threshold.

Working from home

Inland Revenue provides good insight into what you can claim as expenses if you work from home. Suppose your house is 100 square metres and your office is 10 square metres: you can claim 10 per cent of power and gas, 10 per cent of rent or mortgage interest payments, 10 per cent of internet costs, 10 per cent of toilet rolls and hand soap, and so on.

Essentially, you can claim 100 per cent of expenses that are solely used for business purposes. For any expense, Inland Revenue insists that you keep good records for seven-year periods, or in my case, a drawer full of receipts that are fading by the minute.

Entertainment expenses

A similar rule applies to entertainment or work functions. You can claim 50 per cent of an entertainment expense – whether that’s after-work drinks, or business meetings – so long as the meeting was exclusively for business purposes. I’ve found this to be particularly hard to quantify in recent years as I might be having dinner with friends and a conversation might lead to a good news story. Was this a business expense, therefore? As a law-abiding citizen who feels ethically bound to pay taxes for the betterment of society, I suppose it is not but wish it did.

Vehicle expenses and travel

You can claim a flat rate of 25 per cent of your vehicle expenses for business purposes if you deem this to be fair and reasonable. Anything more than 25 per cent needs justification – which could be a logbook that records every trip so that a business percentage can be calculated.

The mileage has changed insofar as you may claim 82 cents per kilometre up to 14,000 kilometres. You can claim 100 per cent of vehicle expenses if it is solely used for business, which means you will probably have to have another car or in my case – a bike – for personal use.

While you can deduct the travel from your work to a business meeting, this doesn’t include the travel between your commute between your home and your place of employment.

For all the jet-setters out there you’re in luck. You can claim 100 per cent of expenses incurred during your trip provided that you are not tacking on a holiday to the end of your work trip. Note, this doesn’t include the travel between your home and your place of work on a daily basis.

A case for keeping expenses above board

For those working “for the man”, the Income Tax Act provides for an employment limitation, which denies a deduction for expenses incurred in deriving employment income. Essentially, salary earners can’t claim deductions, while contractors and business owners can, which perhaps explains why Aotearoa is an island full of small business owners.

Interestingly this is not the case in Australia. In the Australian case of Ogden v Commissioner of Taxation a man was employed by IBM as a professional sales commission agent. He earned a base salary in addition to sales commissions and incentives. He would work from home, hot-desk occasionally, and travel to clients.

Over two years he claimed expenses including: the secretarial services of AU$5388 for his seven-year-old son, stationery, including a Dora the Explorer pencil case, AU$1000 worth of batteries for his office calculator, sunglasses for use while travelling to meet clients, and rubber-soled shoes to prevent static electricity from obliterating his laptop.

The Administrative Appeals Tribunal found the expenses to be “private expenditure, pure and simple”.

What does this all mean? Tax deductibility comes down to a person’s ethical compass, and keeping sound records. It also represents the haves and the have-nots. Those who know more of how to get around the system generally have more than those who don’t.

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