110289 Topic 6: Deductions & Depreciation
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- Deduction covered under general permission (s DA 1) in conjunction with Subpart DE (relating to the keeping of records) e.g. fuel, oil, repairs and maintenance, insurance, WOF, registration fees, road user charges, and parking
- Apportionment must be made if used for both business and private purposes, only the portion of business use can be claimed for expense deduction and depreciation.
Four methods to calculate the business use proportion:
- 1) Actual expenditure (s DE5) – use when actual expenditure is higher then given
- 2) A logbook (s DE6 - DE11) – 90-day test
- 3) Mileage rate (s DE12) – currently at 77 cents per km.
- 4) When records are insufficiently kept, the deduction is limited to the lesser of either the proportion of actual business use or 25% of total use.
If no records, no deduction is allowed
Home Office Expenses
- Business portion of the outgoings and depreciation is deductible against taxpayer’s income (other than a private nature, capital nature, or in deriving employment income)
- Typical deductible outgoings - e.g. rates, electricity, heating, fuel, insurance (house and contents), repairs and maintenance, rents, interests on mortgage, etc.
- Apportionment, based on % of size of “office” to the total floor area of the home
Home office expenses - Telephone & Tolls
- 50% of line rentals can be claimed
- Tolls generally based on actual usage
- • Business related toll calls are deductible
- • Private toll calls are not deductible
Generally covered by general permission, unless they are associated with one of the general limitations (e.g. private or capital expenditure).
- - Legal costs associated with breach of contract – deductible under s DA 1(1)(b)
- - Legal costs associated with the purchase of a rental property (capital cost) – notdeductible
Legal costs - Specific provisions allow a deduction:
- - borrowing money used as capital in deriving assessable income (s DB 5);
- - obtaining or renewing leases (s DB 18);
- - grant, maintenance or extension of a patent (s DB 37);
- - s BD 62 - from 1 April 2009, up to $10,000 per annum of business related legal expenses can be fully deducted, without the need to distinguish between revenue and capital (a concession to reduce compliance cost)
Payments to spouse
No deductions (prevent income splitting), UNLESS:
- approved by the Commissioner in advance;
- - payment is for genuine services rendered; - remuneration paid is in an arm’s length transaction (reasonable).
- - Prior written approval from IRD is required before deduction is made
Deductions for Farmers
Farm dwelling costs - 25%, if the dwelling is located on the farm - eg. depreciation, repairs and maintenance, electricity, etc.
- Further concessions available:
- - Home telephone rentals – 100%
- - Rates – 100 % (both land and dwelling), but only for full time farmers
- - Interest - 100% (no apportionment required), but only for full-time farmers
Repairs and Maintenance
Capital or revenue? Has the taxpayer repaired / maintained the asset or improved / replaced the asset?
Two step test
- 1) Identify the asset being worked on
- 2) Consider the nature and extent of the work - whether the asset has been improved or merely confined to remedying wear and tear?
Losses - Net loss & Treatment of net loss
- Net loss
- - When annual total deduction is more than annual gross income - s BC 4 (3)
- Treatment of net loss – s BC 4 (4); Part I
- - Carried forwarded and deducted from net income in a future year
- - Made available to another person for a deduction
- - Certain other ways (ie. paying shortfall penalties)
New rules - Mixed use assets
- Applies to assets which are mainly purchased for private enjoyment, but are also rented out from time to time
- New rules are tighten the tax treatment on deductibility of expenditure incurred when assets are used for both income earning purposes and private purposes - Deductions is apportioned based on the ratio of income earning use to the total use
Deductions under old rules
Under old rules, because the asset was available for generating income, expenses could be deducted in proportion to the number of days that the asset was available to earn income, whether it was earning income or not.
Deductions under new rules
Under new rules, expenses can now only be claimed for a proportion of the time that an asset is actually in use.
- - Income earning days includes days for which income was earned, and which used by owner to make repairs for damage caused by renters
- - Counted days = days of private use, plus some other days (eg. when family or associates are using the property)
DEPRECIATION - For Accounting purposes
Defined as a “systematic allocation of depreciable amount of an asset over its useful life” - NZ IAS 16
DEPRECIATION - For tax purposes
- - The general permission allows a deduction of expenditure or loss, including a depreciation loss - s DA 1
- - The capital limitation denies a deduction of expenditure in capital natural - s DA 2 (1)
- - But the capital limitation does not apply to a depreciation loss – s DA 4
DEPRECIATION - A person has a “depreciation loss” if:
- - The taxpayer owns the asset
- - The asset is depreciable property (reasonably decline in value)
- - The asset is used or available for use to derive assessable income
- - The amount is calculated using one of the statutory methods and one of the prescribed rates
- Diminishing value (calculated on adjusted tax value)
- Straight line (calculated on cost)
- Pool method (asset cost or adjusted tax value, $2,000 or less)
- The choice of methods is left to the taxpayer.
- Not required to use same method for all assets.
- Can elect to change the method of depreciation.
- GST registered persons generally calculate depreciation on GST exclusive cost, non-registered persons use GST inclusive cost.
- Each category and type of asset has its own particular economic depreciation rate
- Taxpayers have a right, by law, to apply for a different rate of depreciation
- 20 % loading on new assets has now been removed, only applies to qualifying assets were purchased before 20 May 2010.
- Low value assets costing no more than $500 can be written in the year of purchase (effective rate 100%)
- Buildings with life of more than 50 years – 0% from 1 April 2011 (NZT 10.4.4)
- On application to IRD, assets which can no longer be used can be written off
- Depreciation number always "Purchase price @ start X Dep'n rate".
- In year 1, same as SL. In year 2, dep'n number is "adjusted tax value @ start of year 2 (end year 1) X Dep'n rate"
- Pool method:
- then minus this from endATV
Depreciation on Disposa
On the disposal or sale of assets there will either be:
- - depreciation recovered (assessable income) or
- - a depreciation loss (deduction)
No depreciation is calculated in year of sale
Depreciation on Disposal
1. Calculate gain or loss (opening ATV minus sale price)
2. If sale price is greater than ATV, gain is assessable income and is the lesser of:
- • total depreciation previously claimed
- • sale price minus ATV
If sale price is less than ATV, the loss can be claimed (except for a building)
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