PONSONBY PROFESSIONALS

LOGAN GRANGER: Is my coffee expense 100% tax deductible?

It has been difficult for Inland Revenue to establish the boundary between private and work related expenditures.

Some costs may have been occurred with business-driven purpose, however it may not be tax deductible as it can be considered as a private expense to the taxpayer. A good example would be ‘Food’. Food is the primary survival need, therefore considered as a private or domestic expense to a self-employed person, therefore meal costs for the self-employed taxpayer are considered not deductible as a business expense.

Although, exception is made when the private element is incidental to a wider business purpose.

In a situation where the self-employed person is entertaining the client at the restaurant the costs are treated as business deductible expense but 50% of the cost is subject to non-deductibility under the entertainment rules.

Identical principles apply to the shareholders of the Look-Through Companies and the partners of the partnership. It is viewed as the individuals have deemed to incur the costs themselves for tax purposes.

However, a different outcome will apply in a scenario where the employer pays the cost incurred by an employee from entertaining a client or while on business travel. It is viewed from the employer’s perspective as 100% tax deductible staff cost/ travel cost since they are not viewed as private.

All this will sound awfully complicated! Therefore the below table has been prepared to clarify things by showing different scenarios and the respective outcomes:

Another important aspect to remember is when the expense is treated as personal, hence not tax deductible, GST treatment will be the same therefore no GST can be claimed.

Inland Revenue is carefully examining the expenses claimed by the entities, therefore it is crucial to keep the accurate records of the purpose of any business expenses claimed and correctly classify them for tax purpose. If you are unsure of claiming the expenditures as business claim, seek advice from the tax advisors who can direct you to the correct answer.  PN

SCENARIO

Self-employed individual incurs costs for own meals.

Self-employed individual incurs costs for meals for self and an employee.

Self-employed individual incurs costs for meals for self and a client.

Self-employed individual pays for meals of employee while employee working out of town.

Self-employed individual pays for meals for self while working out of town.

Company incurs costs for meals for employees (including shareholder employees) and/or clients. No.

Likely outcome is that only the costs relating to the employee are deductible, entertainment or FBT rules may also apply. However, if the purpose for the cost is primarily business (such as a team celebration) the private element may be considered incidental.

Private element may be incidental and all costs deductible but subject to the entertainment rules (50% non-deductible).

Yes.

No, except in very limited circumstances such as where there are no practical or realistic alternatives for meals (e.g. where a supermarket is not nearby and it is unrealistic for the individual to prepare their own meals). The costs on top of what the individual would typically spend may be deductible.

Yes, entertainment or FBT rules may also apply.

ARE THE COSTS TAX DEDUCTIBLE?

Disclaimer – While all care has been taken, Johnston Associates Chartered Accountants Ltd and its staff accept no liability for the content of this article; always see your professional advisor before taking any action that you are unsure about.

JOHNSTON ASSOCIATES, 202 Ponsonby Road, T: 09 361 6701, www.jacal.co.nz