When are Legal Fees deductible for Tax?

According to the Income Tax Act in New Zealand, legal fees can be deductible if they are incurred for the purpose of deriving income or are directly related to a taxpayer's business activities.

Here are some key points regarding the deductibility of legal fees in New Zealand:

1. Business-related legal fees: If legal fees are incurred as part of operating a business or carrying out business activities, they are generally deductible. This includes fees for legal advice, drafting contracts, and defending or pursuing legal action related to business matters.

2. Investment-related legal fees: Legal fees related to the acquisition or disposal of investments may be deductible. This can include fees for legal advice or documentation related to buying or selling property, shares, or other investments.

3. Personal legal fees: Legal fees incurred for personal matters, such as divorce, personal disputes, or wills, are generally not deductible. These fees are considered to be of a private nature and are not directly related to the generation of income.

There is an exemption where taxpayers can claim a deduction when total legal expenses for the year are equal to or less than $10,000.

It's important to note that the deductibility of legal fees can vary based on individual circumstances and the specific nature of the expenses. It's advisable to consult with a tax professional or accountant who can provide guidance tailored to your situation.

When is it Uneconomic to Use the FBT Method for Vehicles?

If you own a company vehicle and are using the Fringe Benefit Tax (FBT) method to calculate the tax on it, there may come a point where it becomes uneconomic to do so. As the cost of the vehicle increases, the amount of income you need to declare under the FBT method may outweigh the benefits of claiming annual expenses. In this blog post, we will explore when it becomes uneconomic to use the FBT method for motor vehicles owned by companies in New Zealand.

First, let's take a quick look at how the FBT method works. Under this method, you declare income of 20% of the cost of the vehicle, and then claim expenses (typically between a few thousand per year), depending on the vehicle's engine size, age, issues etc (Sounds like your favourite accountant). You can then work out the benefits by comparing the two. For example a $10,000 vehicle incuring $5,000 worth of expenses each year:

• Income $10,000 * 20%

  • = $2,000 in “FBT Income”

• Expenses $5,000

• Net $3,000 (benefit)

For vehicles that cost less than say $30,000, the FBT method can be an efficient way to calculate the tax on your company vehicle. However, as the cost of the vehicle increases, the income declared under the FBT method also increases. This means that the FBT payable on the vehicle may become greater than the tax benefits of being able to claim annual expenses.

Another factor to consider is depreciation. In New Zealand, Inland Revenue allows you to claim depreciation of up to 30% of the cost of the vehicle each year. However, in reality, the actual price depreciation of a vehicle is typically around 10% per year. This means that you may only be claiming something you will have to repay in depreciation recovery income later when you sell the vehicle.

So, when does it become uneconomic to use the FBT method for motor vehicles owned by companies in New Zealand? It really depends on the cost of the vehicle and the level of expenses you can claim each year. As a general rule of thumb, if the FBT payable on the vehicle exceeds the tax benefits of being able to claim expenses, it may be time to consider an alternative method.

One alternative method is to use the kilometre rate method, where you claim a set amount per kilometre driven for business purposes. This method can be more tax-efficient for higher-cost vehicles, as the amount you can claim is not linked to the cost of the vehicle.

Another method may involve completing a logbook and applying that % to your expenses. You could also look at whether you should purchase a work-related vehicle where any personal use is mainly incidental.

Please book an appointment directly into my calendar to discuss your options.

In conclusion, the FBT method can be a tax-efficient way to calculate the tax on your company vehicle, but it may become uneconomic as the cost of the vehicle increases. When deciding which method to use, it's essential to consider the cost of the vehicle, the level of expenses you can claim, and the FBT payable. If the FBT payable exceeds the tax benefits of claiming expenses, it may be time to consider an alternative method, such as the kilometre rate method. It's always best to seek professional advice to ensure you're making the right decision for your business.

Working From Anywhere - are these costs deductible?

Reading a Stuff Article about a resort in Bali, Indonesia, that offers a "Work from Anywhere" (WFA) package, where travelers can move in and work from the resort for a month. Contractors and business owners based in New Zealand who can work remotely could take advantage of similar WFA arrangements at travel resorts around the world by making work the predominant purpose of their trip.

To ensure that work is the predominant purpose of the trip, an itinerary should be planned (and followed) around their work committments. This means setting a schedule and keeping track of their work hours. Contractors should also keep invoices and receipts for all work-related expenses, such as accommodation, meals, and transportation, as these may be deductible for tax purposes.

In terms of claiming these expenses for tax purposes, detailed records and receipts of all expenses incurred during their trip should be kept. These records should include information such as the date of the expense, the amount spent, and the purpose of the expense.

According to the IRD's guidelines on business travel expenses, travel expenses incurred for work-related purposes are generally deductible for tax purposes. However, the deductibility of these expenses may depend on whether the travel is considered to be primarily for business purposes or not. If the trip is considered to be primarily for personal reasons, any deductions claimed must be apportioned based on the proportion of the trip that is for business purposes.

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Disclaimer: Information provided to the best of the authors knowledge at time of publication.  Laws are subject to change and independent advice should be sought.  The above information is general in nature and should not be construed or relied on as a recommendation.

Making the most of Expenses

As a business owner, you are likely to incur expenses that are paid for privately, such as office supplies or equipment, travel expenses, or even meals and entertainment. It is important to claim these expenses and bring them into your business, as it can provide a number of benefits:

1. Claiming these expenses can reduce your taxable income, which can ultimately lower your tax bill. This is because business expenses are generally tax deductible, meaning they can be subtracted from your revenue to calculate your taxable income. By claiming these expenses, you are reducing the amount of income that is subject to tax.

2. Claiming expenses that have been paid for privately can help to improve your financial record keeping. This is especially important for small businesses, as it can be easy for expenses to get lost or forgotten when they are not recorded properly. By bringing all your expenses into your business accounts, you can ensure that your financial records are accurate and up-to-date.

3. Claiming expenses can also help to improve your cash flow management. This is because you may be able to claim back GST on certain expenses, which can help to reduce your overall expenses and improve your cash flow. Additionally, by keeping track of all your expenses, you can identify areas where you may be overspending and make adjustments to improve your cash flow.

At Accountech, we understand the importance of effective expense management and record keeping for small businesses. Our team of experienced accountants can provide advice and guidance on how to claim expenses and improve your financial record keeping. We also offer a template cashbook file that is available on request, which can help you to keep track of all your business transactions.