Home office expenses
For self-employed people who aren’t slaves to the office environment, you can claim 100 per cent of expenses that are solely used for business purposes such as a business phone line. For the rest, you can claim a proportion based on how much of your home you use for work.
If your house is 100 sqm and your home office is 10 sqm that means you can claim 10 per cent of your expenses not solely for business such as mortgage interest or rent payments, electricity, insurance, and rates.
Telephone, internet, and vehicle deductions are a pain as you’re required to divvy up what’s used personally and privately. In the case of a car, for example, you can claim full running costs if it is strictly used for business.
To do so, you must record the odometer, destination, kilometres travelled and reasons for every trip. What’s more, you need to keep a motor vehicle logbook for three months every three years. If not, you can claim a portion: up to 25 per cent.
For those wanting to spruce up their office spaces, renovators beware, improvements aren’t tax deductible, but repairs and maintenance may qualify.
Be wary of capital expenses - these are one-off payments for assets needed for business. This could be a till, eftpos machine, or podcast gear in my case. Anything more than $1000 will be depreciated over three years.
Sadly, I have it on good authority that you can’t claim for ceramic mugs, Coffee Supreme beans, Tim Tams, homogenised milk, or that moccamaster you’ve been pining for.
It seems strange that contractors can’t be afforded the same employee privileges of free instant coffee, budget tea bags, and glass mugs a la carte. But, the line has to be drawn somewhere and governed by the Income Tax Act 2007, it comes down to what is considered private or domestic expenditure.
Entertainment and food expenses
In an interpretation statement released in July 2021, self-employed taxpayers cannot deduct meal expenses at home or while travelling, because they are of a private or domestic nature.
In the 1985 case, CIR v Haenga, private or domestic in nature was defined as “exclusively referrable to living as an individual member of society, and domestic expenses are those relating to the household or family unit”.
Essentially, but for the job and location, would you be in a position where you would otherwise be feeding yourself? If so, it’s a no from me.
However, meals in the context of business entertainment are the exception. There are three types of business entertainment expenses. Gifts given to employees for performance are 100 per cent deductible, and liable to fringe benefit tax.
Whether it’s food and drink provided at a conference or education course, freebies promoting your business, or light meals provided in a dining room for senior managers for a meeting, you can deduct 100 per cent of those costs.
Entertainment that has a “significant private element” will be 50 per cent deductible. This includes corporate boxes at sports events, hiring a boat in a work context, work parties, or gifting a bottle of wine to customers, for example.
Suppose I was to go out with a mix of friends and clients, which leads to further work. Sure, the festivities had a work element, but it was private. This goes against the grain when “life’s a stage” and work is all-consuming, but the fear of one day being audited is more than enough reason to be risk averse.
Similar rules apply for travel, insofar as flights and other expenses (other than food) may be deductible if the expenditure has a sufficient nexus or relationship with “the gaining or producing of the taxpayer’s accessible income or with the carrying on of a business for that purpose”, as outlined in 1978 cases CIR v Banks and Buckley & Young Ltd v CIR.
Did you travel, and tag on a work meeting? Or was it a work trip and you tagged on a trip to Las Vegas? The record-keeping and justifications mean the risk of claiming expenses mightn’t be worth the effort. In other words, if there’s a dual purpose to the trip, there’s a significant chance it won’t fly.
Record keeping
To quote Inland Revenue’s statement on overseas travel dating back to last year, in most circumstances, “because the onus of proof rests on the taxpayer, they will need to retain sufficient evidentiary documents to justify any deduction claimed, including evidence justifying the apportionment of costs”.
Records must be kept for seven years, which is a very long time if you were in the hideous position of having to justify every expense claim. Are audits in an expense claim context common? IRD said it was not something it reported on. The absence of information is frightening enough, in my view.
The research leading up to this column may have prompted me to create better recording processes. But really, if I’m ever in doubt, I’ll be leaving it out.
*This story has been updated from a previous version to clarify how much of household expenses are claimable
