Welcome to the last quarter of 2022! We are not sure where the year has gone but we are already thinking of Christmas!
As we have been working our way through various clients files this year, we have come across lots of interesting expense claims clients are putting through. We thought it might be a good idea to remind everyone exactly what can be claimed either partly or fully and what can’t.
Claiming Business Expenses
First of all, what does “claiming expenses” actually mean?
As a sole trader, contractor or company, the IRD allows you to “claim” certain expenses against your business’s income. Those expenses reduce the portion of your total income that you pay tax on, so you pay less tax. You are in effect claiming the tax back from those expenses.
It is important that you keep good records to support your expense claims as without them IRD may not accept them. IRD recommends to either keep a paper receipt or a scan of the original receipt stored with your transaction records or both.
Typical expenses that you can claim for are either towards the day-to-day running of the business; for example, advertising, rent or wages, or for purchasing assets such as machinery, tools or computers, which, if they cost under $1,000 they can be written off 100% as an expense. If they cost more than $1,000, they need to be capitalised and depreciated over time.
Assets lose value over time; this loss of value is known as depreciation. You can claim depreciation as a business expense. IRD has a list of depreciation rates and methods for business assets on their website.
While some expenses can be fully claimed for, such as when they are 100% used for the business, e.g. business premises rent (not home office rent), some other expenses can only be partially claimed for if they are also partly for private use, such as a vehicle or entertainment.
General Business Expenses
Below is a list of typical business expenses that most businesses will incur that are generally 100% deductible.
- General Expenses: General items you purchased for use in your business.
- Printing & Stationery: Work related printing and stationery.
- Tools & Materials: Tools or materials you purchased for use in your business. If tools are purchased over $1,000 they are capitalised and then depreciated.
- Freight, Courier & Postage: Sending goods for business.
- Advertising & Marketing: Advertising or marketing costs for your business, such as signage and website maintenance/upgrades. The costs to create a new website are a capital expense.
- Education & Training: Professional development costs (not obtaining a degree). Post graduate university fees may be deductible if they are undertaken whilst trading.
- Depreciation: on assets required for business purposes.
- Subcontractor: payments to subcontractors who assist with your business. Watch out to see if the subcontractor is GST registered or not.
- Accounting & Legal fees: Business related accounting and legal fees (subject to limitations).
- Business/Income insurance: Income or business related insurance costs.
- Hire of Equipment: Hiring items to help you generate income.
- Licenses & Fees: Work related licenses or permit fees.
- Bank Fees: Business related bank account or merchant service fees. Bank fees don’t include GST.
- Clothing & Apparel: Business branded clothing or protective work clothing. You can’t claim general clothing that you wear to work or even that you bought specifically for work such as suits.
- Gifts: Gifts for employees or clients other than food or drink. You can’t give gifts of cash and any gifts for employees must have a maximum value of $300 per quarter per employee (up to $22,500 per annum). Staff discounts are considered a gift.
- ACC Levy: Payment of your ACC levy invoice. Note, you can’t claim the Earners’ levy portion of your ACC invoice (we will adjust this for you).
- Travel: Business related flights, accommodation, and meals (whilst travelling out of town). Not all costs will be deductible if out of town travel also had a significant private purpose (e.g. out of town travel for a week with only two business related days). An itinerary should be kept to prove business portion.
- Office expenses: Including the cost of coffee, tea, milo, and milk provided for morning teas at an office location.
Meal and Entertainment Expenses
Work related meals and entertainment expenses are categorised in the following categories and are claimed at 50% by default. If you’re unsure what to claim, a good rule of thumb is if it’s helping you earn your income it’s usually claimable.
- Food & Drink: Food or drink with/ for current or potential clients, staff or suppliers. Claimed at 50%.
- Entertainment & Recreation: Entertaining current or potential clients, staff or suppliers. Claimed at 50%.
Home Office Expenses
If you use an area of your home for your business, such as your home office, garage or a workshop, you can claim a portion of the household expenses and reduce your tax bill. How much you can claim of each expense depends on the portion of the home you use for work. E.g. if your home is 100 square metres and your working space is 10 square metres, which is 10% of the total area. This means you can claim 10% of expenses.
Expenses you can claim through home office include:
- Light, power & heating: Power or gas bills for the property.
- Telephone & Internet: Landline or internet for the property or your mobile phone bill. Telephone & Internet is claimed at a standard rate of 50%. If you have a phone that is ONLY used for business you can claim 100% of the cost by using the ‘Telephone & Internet’ code.
- Cleaner: Commercial cleaning fees or cleaning products for the property. You cannot claim your time if you are doing the cleaning yourself.
- Security: Security & alarm system installation or monitoring. You cannot claim the cost of the system itself if this is over $1,000 as this is a capital cost.
- Repairs & Maintenance: Commercial labour or material costs to repair and maintain the property. You cannot claim for your time if you are doing the work yourself. And you cannot claim any alterations that add value to the property, such as adding an extension.
- Rates: Council rates on your property if you own the home.
- Water Rates: Water rates bill for the property.
- Home & Contents Insurance: House or contents insurance for the property.
- Rent: rent you’ve paid to live at the property. Rent does not include GST.
- Mortgage Interest: Mortgage interest only, and not the principal portion of your repayments. Mortgage interest does not include GST
Expenses that are NOT deductible
- Clothes: Even if you have bought a suit solely for work, it cannot be claimed. Only protective clothing or branded uniforms are deductible.
- Health Costs: Doctor visits, chiropractic visits, massages, gym memberships, glasses or hearing aids. Even if they restore your health so you can work, they are not deductible.
- Life Insurance: Life insurance is not deductible, but income protection insurance is.
- Income Tax: No deduction for tax payments. Income tax is the government’s share of our income, not a cost of earning the income.
- GST: For GST registered businesses, GST paid to suppliers, collected from clients and paid to IRD all fall outside our income tax calculations. GST is a tax collected by businesses on behalf of the government. For non-GST registered businesses, however, GST inclusive expenses are deductible as the GST forms part of the final cost.
- Fines & Bribes: Whether incurred while doing business or not, most fines and bribes cannot be claimed.
- Tax Penalties: As with fines, tax penalties are non-deductible.
- Private groceries and meals: these are considered private unless the meal falls into the entertainment or travel category.
Holiday Homes
With the holidays looming, many of you may be considering renting out your home or have another property you rent out for short term. We thought we would look at things you need to consider when doing this.
Rental Agreements
When a house you own is used as a holiday rental, you’re not covered by the Residential Tenancies Act. This means standard rental agreements don’t apply.
Some hosting sites, like Airbnb, include booking terms and conditions in your page listing. If terms and conditions aren’t included when you list your rental, you’ll need to create and enforce a written agreement outlining your terms and conditions.
The agreement should cover rules and expectations about:
- payments, including deposits and refunds
- maximum number of guests
- pets
- camping, e.g. extra guests can/can’t pitch a tent on the lawn
- smoking/non-smoking
- liability, e.g. if someone has an accident on you property.
If you use a template provided by your preferred hosting website, make sure it suits your situation and covers everything you need it to.
Check your preferred hosting site for rental agreement templates and tips on attracting and vetting guests.
If you’re a landlord
You can’t ask tenants to move out temporarily so you can make more money over the summer by using the property for Airbnb or similar.
If your tenants decide to sublet the property while they’re away, they need your permission and must abide by their tenancy agreement. They can’t sublet the property without your permission.
Tax Obligations
Income you receive for providing accommodation, including through websites like Airbnb or Bookabach, is taxable. This includes any payment for one-off or irregular rentals. Special tax rules apply to calculating income and expenditure from short-term rental accommodation (also known as short-stay accommodation) depending on the type of property and its use.
This means you:
- must include the income on an Individual tax return (IR3). This can be filed online via your myIR account — for most people it’s due 7 July
- can claim expenses for the time you rented out the property/ space, eg rates, insurance, cleaning and advertising – refer to the special tax rules for your property type and use.
- must keep clear records to confirm all income and expenses.
GST rules apply if your income is over $60k in a 12-month period. They also might apply if you offer guests meals, cleaners or other services in addition to accommodation.
Special tax rules
Inland Revenue has a number of publications on short-stay accommodation to help you work out which rules apply depending on the type of property and use, eg, the “standard rules” or “mixed use asset rules” (discussed below). You can start with Inland Revenue’s short-stay accommodation overview, which has a flow chart to work through which rules apply to your type of property and its use.
Claiming expenses
You can only claim expenses if you declare your rental income in your tax return. The special tax rules may limit the expenses you can claim depending on the type of property the use and how long it is available to rent. These rules provide guidance for working out how to calculate your income, expenses and taxable income that you must include in your income tax return.
Remember:
- Keep clear records to confirm all income and expenses.
- Expenses you can claim include rates, insurance, cleaning and advertising.
- You can only claim expenses for the time you rented out the space/ property.
- If you’re renting out a room, you can only claim a proportion of your household expenses.
Insurance
Your usual house and contents insurance might not cover you if something happens while your property is rented out. Speak to your insurer — you may need to pay a higher premium or arrange extra cover, but this is better than finding out too late that damage isn’t covered.
Talk to your insurer about cover for:
- theft or damage by short-term holiday tenants
- cover during times the property is empty
- loss of income — if something major happens and you are unable to rent the property out.
As well as cover for the property and contents, consider public liability insurance. This is cover to protect you if a guest gets hurt while staying at your property.
Some hosting websites offer free cover for these types of things, but it’s worth a chat with your insurance company either way.
Health and safety
Check whether there are any regulations you need to comply with — your local council is a good place to start.
Examples include:
- Fit smoke detectors throughout the property and check these are in working order every three months.
- Any deck more than 1m high has a fence of at least 1m high right around it.
- Any pool deeper than 400mm is fenced.
- Hazardous items like chemicals and poisons are properly stored and kept out of sight.
- Any kayaks or boats provided for use are seaworthy and life jackets are provided.
Mixed-use assets
Mixed-use assets are holiday homes or boats with both private and income-earning use. You need to work out how much private and income-earning use each asset gets, as this decides how much income you declare and what expenses you can claim.
You have a mixed-use asset if during the tax year the asset is:
- used for both private use and income-earning use
- unused for 62 days or more.
The rules apply to any:
- property, regardless of cost price or current value
- boat which had a cost or market value of $50,000 or more when you bought it
- additional item or accessory relating to the asset, for example a quad bike stored at a holiday home.
The rules do not apply to a:
- residential property used for long-term rental
- business asset where the private use is minor, for example once a year
- home office where your expense claim is based on floor area
- room in your home rented out for short-term stays.
These are known as excluded assets.
Mixed-use assets and GST
The mixed-use asset rules also apply to GST.
If you’re GST-registered, you can claim GST on the percentage of expenses that relate to the asset’s business use.
Learn more about the GST rules on mixed-use assets on the IRD website.
Opting out of the mixed-use assets rules
If you meet certain criteria, you can choose to leave out income and expenses relating to your asset from your income tax and GST returns. You can opt out if:
- your gross rental income for the tax year from the income-earning use of the property is less than $4,000 or
- you make a loss, and your gross rental income from income-earning use is less than 2% of the value of the property. In calculating this, use the rateable value
or the purchase price if that is more recent (and if you didn’t buy the property from an associate).
The above exemptions don’t apply to holiday homes owned by companies.
Losses from renting out holiday homes
Your holiday home’s income-earning expenses can be more than the rental income from it. This will result in a loss.
These rental losses mean you cannot deduct all apportioned expenses for that year. This will be the case if your gross income from the income-earning use is less than 2% of the holiday home’s value (use the rateable value or the purchase price if that is more recent and if you didn’t buy the property from an associate). When this happens deduct your apportioned expenses up to the amount of the rental income.
You’ll have to carry forward the deductions over and above the rental income you got from the holiday home. You’ll then use them against income from your holiday home in a future tax year.
GST rules are changing
IRD are changing GST rules for invoicing and record keeping. This means GST registered businesses may need to update some of their business processes and systems. The changes are designed to support e-invoicing and electronic record keeping. Most of the changes come into effect on 1 April 2023.
More information here: