Are you claiming for expenses where you could and should be?
The concept of claiming business expenses is determined by what is called a ‘nexus’ test. This is the link between the expenses you incur and your income. In general, items that do not relate to the income you earn are not tax deductible.
There are a few things that fall into a ‘grey area’ for tax purposes. It’s always a good idea to talk to your accountant about these so you can avoid taking an approach that is either ‘conservative’ or ‘aggressive’. Being conservative will result in more tax being paid, while being too aggressive can lead to penalties and interest that exceed any short-term saving.
Below is a list of adjustments or items your accountant may make while completing your tax return. Savings made in these areas could even end up paying for your next round of Christmas shopping!
Essentially, the home office claim is a tax-free distribution from the company to you. This is done by way of a reimbursement. If you are using a portion of your home for business purposes, the Inland Revenue will allow you to make a claim against the cost of your household. An example is a bedroom converted to an office space which makes up 10 per cent of the household floor plan. In this situation, you would be allowed to claim 10 per cent of rent or interest, rates, insurance, power, water, etc.
Considering Auckland house prices, a 10 per cent claim could potentially be $2,500-$3,000 on interest alone (10 per cent of the interest cost for the year). Add in other costs and the total amount of expenses could be $5,000 which could lead to a saving of $1,400 in tax.
Motor vehicle costs
1. The easiest is claiming the mileage of your private vehicle that has been used for business. This means that you will need to keep a record of all the business mileage driven during the year and, so long as it is under 5,000, you can multiply that amount by $0.72 (the current rate for the 2016 financial year).
2. The other option is to keep a log book and record your travel for a normal three-month period including both personal and business use. You will then be able to claim the business percentage, according to the log book, of all the motor vehicle expenses incurred during the year including a depreciation charge. This may seem like a lot of work but with software like Xero, it becomes a lot easier to track.
3. The last method is where a company purchases the vehicle in its name. The company is then entitled to claim all costs relating to the vehicle including depreciation, regardless of whether the car is used for private or business purposes. In most cases, the company will need to pay fringe benefit tax (FBT) on the private use of the motor vehicle. This can often scare people off, due to the increase in the amount of returns that need to be filed. However, this is not always the case, as your accountant can remove the FBT at the year-end via an FBT reimbursement journal. The decision to purchase a car through your company and also use it for private purposes isn’t always straightforward. Make sure you discuss this option first with an accountant before going ahead.
When paying employees, you must also accrue during the year any holiday pay owing to them. This is not, in itself, deductible as the leave hasn’t been taken. Technically, it hasn’t been incurred during the income year. It is included as a deduction in your profit and loss but added back to your taxable income. However, if any leave is taken within 63 days of the end of your tax year (i.e. within 63 days of 31 March for most New Zealand businesses) you can claim for that expense. Depending on your year-end, this could lead to a significant tax saving. For example, for a December year-end business a lot of employees will be on leave in January. Each day the amount of paid leave taken could amount to thousands of dollars of tax savings. This is only a temporary difference, as it will need to be paid back in the following year’s tax return. However, if I could delay paying something back for a year I would take it.
As you have just gone through the Christmas period you will be very aware of the costs that can be incurred which fit into this category. The staff and client Christmas functions can all add up.
Some business-related entertainment expenses are 100 per cent deductible. Others are only 50 per cent deductible because they have a significant private element. Even if you think the private element was more or less than 50 per cent of the expense, you can only claim 50 per cent of the expense as a deduction.
In general, any entertainment away from work or out of usual work hours has a private element. For a detailed list of 50 per cent or 100 per cent entertainment activities talk to Crowe Horwath or visit the Inland Revenue for guidelines.
Withholding tax earners vs employees
If you are treated as a PAYE employee of your company, you are not entitled to any deduction for costs incurred by you to perform the job. However, if you are a contractor you will be entitled to claim the expenses that have a ‘nexus’ to your income. While these expenses include the items outlined above, you do need to keep a detailed record of them. While this may appear onerous, it is often not as time consuming as you might think and could ultimately save you a lot of money.
Overall, taking a cautious approach to claiming expenses can have its benefits with the main one being that you can sleep easy at night. However, by doing so you could miss out on opportunities to claim for expenses you are entitled to. Your hard-earned money doesn’t have to be given away to the tax man when it isn’t necessary to do so. Make sure you are getting what is due, so that you can invest it in the business or yourself.
By Stuart Ruddell, Crowe Horwarth Senior Accountant