Understanding Tax Deductions NZ

What are Tax Deductions?

Tax deductions are reductions in taxable income that individuals and businesses can claim to lower their tax liability. These deductions are expenses incurred in the process of earning income. Common examples include business expenses, charitable donations, and interest on loans. By claiming these deductions on your tax return, you can effectively reduce the amount of income tax you owe. Understanding and utilizing tax deductions can significantly impact your financial health by lowering your overall tax burden.

Who Can Claim Tax Deductions?

Anyone who earns income and incurs related expenses can claim tax deductions. This includes sole traders, businesses, and individuals with income from investments or other sources. To successfully claim tax deductions, it’s crucial to keep accurate records of all expenses and income. Meeting the eligibility criteria set out by Inland Revenue is also essential. Proper documentation and adherence to Inland Revenue’s guidelines ensure that your claims are valid and can withstand scrutiny.

Managing business expenses is an integral aspect of operating a business. However, it’s crucial to know what tax-deductible expenses are and which expenses do not meet the criteria in NZ. Tax-deductible expenses can also include interest incurred on residential property, with specific rules and exemptions such as deductibility rules for new builds and a phased deduction process for existing mortgage debts. After all, it can the difference between paying the correct amount of tax to Inland Revenue or paying more than your fair share. As business owners, we want to maximize our legitimate expense claims by effectively claiming expenses.

The three fundamental rules of tax-deductible business expenses

In general, there are three fundamental rules to ensure your business expense claims are correct and the risk of Inland Revenue challenge are reduced. Adhering to Inland Revenue’s regulations is crucial to ensure compliance and avoid penalties.

1. The expense must be for business purposes. Flip this around and what we mean is that the expense cannot be for personal use.

2. If an expense is incurred for both business and personal use, you can only claim the portion attributable to your business.

3. Proper records must be maintained to substantiate the expense.

What’s non-deductible for tax purposes in NZ according to Inland Revenue?

There are, however, certain business expenses that are not eligible for a tax deduction in New Zealand. Examples of these non-deductible expenses include:

1. The principal portion of loan and finance repayments.

2. Fines. For example, for speeding tickets or parking violations related to personal or business vehicles.

3. Penalties imposed by the IRD for late filings or payments.

4. The cost of acquiring new equipment, machinery, or plant. These assets may be subject to depreciation over time. What this means is that the asset can be written off over a number of years based on Inland Revenue depreciation rates.

5. Premiums for life insurance, accident insurance, personal sickness coverage, mortgage protection insurance, and income protection insurance.

6. Most clothing, footwear, and eyewear, except when required for specific job roles such as uniforms or safety boots.

7. Legal expenses related to capital acquisitions.

8. Interest on loans for residential investment property may not be deductible under certain conditions, especially with recent changes to interest deductibility rules. It is advisable to seek professional tax advice to understand how these regulations impact property owners.

Understanding Business Expenses

Business expenses are the costs a business incurs to generate income. These expenses are crucial because they can be claimed against your taxable income, effectively reducing the amount of income tax you owe. Understanding what qualifies as a business expense is essential for maximizing your tax deductions. Business expenses can encompass a wide range of costs, including salaries and wages, rent, utilities, equipment, and supplies. To ensure you can claim these expenses, it’s vital to keep accurate records, such as receipts and invoices, which will support your claims when filing your tax return. Additionally, businesses may also need to pay income tax on capital gains from the sale of assets, including property.

Eligibility for Claiming Business Expenses

To claim business expenses, your business must be operating with the intention of making a profit. This means you need to demonstrate that your business is actively engaged in income-earning activities. Whether you are a sole trader, part of a partnership, or running a company, you can claim business expenses, but the specific rules and regulations may vary depending on your business structure. Consulting with a tax agent or accountant is crucial to ensure that all your business expenses are eligible for claims and that you comply with Inland Revenue’s regulations. This professional guidance can help you navigate the complexities of tax laws and optimize your tax efficiency.

Interest Deductibility

Interest deductibility is a valuable tax deduction for individuals and businesses that have borrowed money to purchase an investment property. The interest paid on such loans can be deducted from your taxable income, thereby reducing the amount of income tax you owe. However, it’s important to note that there are specific rules and restrictions around interest deductibility. Not all interest payments qualify for this deduction, so it’s essential to understand the criteria and ensure your claims are compliant with Inland Revenue’s regulations.

Keeping Records for the IRD

Accurate record-keeping is fundamental for claiming tax deductions and complying with Inland Revenue’s requirements. Both individuals and businesses must maintain detailed records of their income and expenses, including receipts, invoices, and bank statements. These records should be kept for at least seven years and must be in English unless otherwise approved by Inland Revenue. Utilizing online accounting software and mobile apps can streamline the record-keeping process, making it more efficient and less time-consuming. Proper documentation not only supports your tax deduction claims but also ensures you are prepared in case of an audit.

Summary of Claiming Expenses and Tax-Deductible Expenses in NZ

As a rule, if a business expense directly related to your taxable income, you should generally be able to claim a tax deduction for it.

Examples of everyday business expenses that may qualify for tax deductions include:

1. ACC costs. Read more about ACC in New Zealand: How ACC Works for Businesses: A Guide for Owners

2. Vehicle expenses, transportation costs, and travel for business purposes. Read more vehicle expenses in our article: Deducting Vehicle Expenses For Business: What You Should Know As An NZ Business Owner

3. Rent payments for business premises.

4. Depreciation on assets. Read more depreciation in our article: Understanding Depreciation

5. Entertaining clients. Read more entertainment deductibility in our article: Entertainment & Gifts

6. Bank and loan fees.

7. Interest on borrowed funds for business purposes.

8. Certain insurance premiums e.g. public liability, professional liability, business assets.

9. Work-related publications like trade/professional journals and magazines.

10. Memberships in professional/franchise/trade and retail associations.

11. Home office/workshop expenses. Read more about claims in our article: Home Office Claims for Business Owners

12. Work-related mobile phones and associated bills.

13. Postage, Stamps & Stationery.

14. Work uniforms. Read more about work clothing in our article: Tax Deductible Clothing

15. Fees paid to tax agents.

16. Travel on business. Read more about this in our article: Claiming Travel Expenses in Business

17. Entertainment expenses, such as client meals and staff functions, which can be partially claimed.

18. Interest deductibility for loans related to business operations.

The specific amount of deduction and the timing of its claim may vary depending on the nature of the expenses.

It’s important to note that this list of tax-deductible expenses is not exhaustive.

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If you are interested in optimizing your business expenses and tax efficiency, we are here to assist you.

Please reach out to us to discuss your expenses and tax-related costs, and we will work with you to identify relevant reliefs, incentives, and allowances that can be leveraged. We have been Chartered Accountants for Auckland (and beyond) for years! – 09 262 0726.

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