Income tax ñ Allowable deductions overview
Net income (or net loss) is calculated by deducting annual allowable
deductions from the total amount of gross income for an income year. Annual
allowable deductions are the sum of all amounts of allowable deductions incurred
in an income year. Only business expenditure will be an allowable
deduction.
General overview
Generally, an item or service will be an allowable deduction if it has
been purchased in the course of carrying out the business activity.
An item or service will not be deductible if it is purchased for private
use or is a substantial asset. However, where expenses are not totally for
business use, the expenses can be apportioned in order to calculate the
business portion of the expense.
Be aware that some specific business expenses will have their own separate
rules.
When in doubt over the treatment of an expense, ask your advisor before
you purchase it.
Employment
Expenditure incurred in deriving salary or wages is not deductible. This is
because the expenditure is not incurred for business
purposes.
Entertainment
Business expenditure for food, beverages, recreation, and related
accommodation and transportation is 50% deductible.
The following expenses are 100% deductible:
Food or beverages consumed while travelling on business;
Food or beverages consumed at a conference or educational course;
Overtime meal allowance;
Morning or afternoon tea provided during work hours; and
Food or beverage samples for advertising purposes.
Interest
Generally, interest is deductible for funds borrowed to purchase assets
used in the business activity.
However, interest is not fully deductible if part of borrowed funds is
used for a private use, or a use that is incapable of producing income.
Only the portion of the interest relating to the income producing use is
deductible.
Trading stock
A reduction in the opening value of trading stock is an allowable
deduction.
The value of trading stock is calculated by measuring the difference
between the opening value of trading stock and the closing value of trading
stock.
Trading stock includes:
Livestock; and
Anything manufactured, produced, or acquired for the purposes of
manufacture, sale, or exchange.
Donations
A rebate is allowed where a minimum $5 gift of money is made to certain
approved organisations.
The amount of the rebate is the lower of either: one-third of the gift or
$500.
Bad debts
A bad debt that is written off is an allowable deduction.
A bad debt can be wholly or partly written off. A bad debt will only be
accepted by IRD as written off when there is no reasonable or probable
expectation of recovery.
Professional services
Legal, accounting, or any other professional service expenses are
deductible, provided they are incurred as part of the business activity and
are not a substantial asset.
A deduction is not available for the following activities:
Forming, registering, liquidating, or selling the business;
Acquiring a licence for the business;
Altering the capital structure of the business; or
Drawing up a partnership deed or trust deed.
Bursary payments
Bursaries or similar payments offered by employers to attract staff, are
deductible.
The expenditure is deductible whether paid to, or on behalf of, an
employee or for a prospective employee on condition that they stay with the
employer for a specified time.
Penalties
Penalties, bribes, use-of-money interest charges and income tax are not
deductible.
Lawyers expenses in defending criminal or civil penalties are not
deductible.
See us first
Before making any financial decisions.
To assist you in meeting the necessary legal or financial requirements.
If you consider that any of the issues contained in this fact sheet may
affect you.
Disclaimer
Important: This is not advice. Clients should not act solely on
the basis of the material contained in this fact sheet Items herein are general
comments only and do not constitute or convey advice per se. Changes in
legislation may occur quickly. We therefore recommend that our formal advice be
sought before acting in any of the areas. We believe the contents to be true and
accurate as at the date of writing but can give no assurances or warranty
regarding the accuracy, currency or applicability of any of the contents. This
fact sheet is made available to our clients as a helpful guide for their private
information. Therefore it should be regarded as confidential and should not be
made available to any person without our prior approval.
Copyright: No unauthorised copying permitted
HF127
Last updated August 2004
