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Depreciation

If you purchase an asset with a cost greater than $500, it must generally be added to the fixed asset schedule of the business and depreciation claimed over the assets useful life at prescribed rates set by the IRD. Any assets costing less than the $500 threshold are classified as ‘low-value assets’ and a full deduction may be claimed in the year of purchase. It should be noted that the total value of all purchases made on the same day from the same supplier must be less than $500 to qualify for the full deduction for eg. A taxpayer purchases 6 chairs at $200 per chair as part of the same purchase. The total value of the purchase is $1200 so this does not qualify for the full tax deduction.

Depreciation Recovery

Disposal of a fixed asset will give rise to a gain or loss on sale. Any gain in excess of the assets original cost will generally be a capital gain and not subject to income tax. Any gain over the assets current depreciated value (book value) is termed “depreciation recovered” and is subject to income tax. Where an asset is sold for less than it’s current depreciated book value a further deduction is generally allowed for the balance of this shortfall.

Repairs & Maintenance

Expenditure which is remedying fair wear and tear is generally deductible in full. If significant improvement is made to the asset which is beyond merely restoring an asset to a previous standard then the asset may need to be capitalised and depreciation claimed over the assets useful life.

Home Office

You are entitled to claim a deduction if you use a part of your home for business activities or to store business goods or records. The area of the home must be specifically defined and identified ie. an office or garage. The area of the home used for business is then compared to the total area of the house to determine the percentage of home expenses which can be claimed. A deduction of this percentage is available for electricity, rates, water rates, insurance, mortgage interest and repairs & maintenance.

Telephone Expenses

Where a mobile phone is required as part of your business activities the full amount of any rental charges and calls are deductible. A reimbursement or adjustment should be made for any calls of a private nature. The IRD also accepts that where a taxpayer conducts business activities from home that a deduction of 50% of the home line rental may be allowed. A deduction may also be made for home internet rental and useage. If there is an element of private internet useage then the deduction should be reduced to reflect this private portion.

Travel

Travel expenses incurred as part of business activities are deductible. Along with keeping all receipts and travel tickets you will be required to keep details of the reason for the trip and the people visited while on the trip. All food and entertainment expenses that are incurred while you are away from home are also deductible. If you take a spouse or partner on the business trip this may also be deductible if your spouse is an employee in the business, is providing some influence on business decisions or is expected to be present.

Entertainment

Entertainment is generally either fully deductible or 50% deductible. Entertainment which is regarded as having no private enjoyment is generally fully deductible while entertainment expenses which are regarded as having a private component is 50% deducible.

Fully Deductible entertainment expenses include:

• Food or beverages consumed while traveling in the course of business activities
• Food or beverages consumed at a conference, education course or similar event which last for at least 4 consecutive hours unless the event is principally for the purposes of entertainment
• A reasonable amount of food or beverages consumed by an employee by reason of an employee working overtime and a meal allowance or similar reimbursement payment would otherwise be required to be paid
• A reasonable amount of food or beverage is provided as a morning or afternoon tea or as light refreshment at the person’s business premises or at a conference, educational course or similar event.

Entertainment expenses which are 50% deductible include:

• Food or beverages consumed as part of a party, reception, celebration meal or other similar social function for eg Christmas function which is not held at the employment premises
• Corporate boxes, corporate marquees or tents or similar exclusive areas at sporting, cultural or other recreational events or activities occurring off the business premises of the taxpayer.
• Holiday accommodation or pleasure crafts.

Interest

A deduction for interest can be claimed when it can be demonstrated that the interest cost was incurred in generating taxable income. When loan repayments comprise both principal and interest, the repayments are split as it is only the interest cost which is deductible against taxable income.

Stock

When compiling your financial statements an adjustment is made for opening and closing stock to derive at your taxable income for the year.

A stocktake must be completed at the end of each financial year. Stock is always recognised at the lower of cost or net relisable value.

Records of physical stocktakes and other supporting documentation must be retained should the IRD ever request copies of them.

Record Keeping

All your business records including invoices, bank statements, IRD returns and stocktakes should be retained for a period of seven years.

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Markhams are Chartered Accountants and Business Advisors. They’re a New Zealand network of Chartered Accountancy firms located around the country, providing financial and accountancy services to a wide range of clients.

For more information or specific advice, you can contact Sam or Jess, or visit the Markhams website.

Sam Basset: Phone (09) 306 7103 or email sam.bassett@markhams.co.nz

Jess Galyer: (09) 306 7109 or email jess.galyer@markhams.co.nz

All information in this article is to the best of the Author’s knowledge true and accurate. No liability is assumed by the authors, or publishers, for any losses suffered by any person relying directly or indirectly upon this article. It is recommended that clients should consult a senior representative of the firm before acting on this information. The member firms practicing as Markhams are independent and not in partnership.