Covid-19 related costs & deductibility issues
It’s an understatement to say that the past two years have been a tough ride for a number of businesses, and some will clearly have incurred types of expenditure which would be categorised as unusual or abnormal, in an attempt to survive the current environment.
Inland Revenue has now acknowledged the present scenario, and that some taxpayers may be uncertain as to their ability to claim these unusual/abnormal expenditure items as tax deductible in the year incurred. As a consequence, IR has been kind enough to release PUB00432, a draft interpretation statement titled ‘Income Tax – deductibility of costs incurred due to Covid-19’.
The most important thing I appreciate you’ll want to know, is that it’s only 24 pages in length, so not too taxing to get through (and yes the pun was intended).
When considering application of the general permission (pretty hard to cross the deduction line if you can’t satisfy the requirements of section DA 1 in the first instance), the statement sets out four key principles:
- It is important to consider how the business earns its income, and whether the cost relates to that process;
- The factual situation at the time the cost is incurred is relevant;
- A cost does not need to be linked to a particular amount of income, or even be incurred in the same year; and,
- Costs incurred to protect a business can be deductible.
Next there is a brief discussion on section DA 2 which contains the general limitations, with the primary focus (ok the sole focus) being on our good friend, the capital limitation.
Having now outlined the general principles of deductions and then how any entitlement to claim may be swept away by application of the capital limitation, the remainder of the commentary focuses on four specific types of costs:
Employee costs including:
- Relocating new or existing employees to New Zealand, including obtaining visas, exemptions, places at managed isolation and quarantine facilities and transport.
- Retaining teams in New Zealand where they may be unable to work (such as paying retainers to contractors) or keeping teams housed together in a bubble.
- Payments to employees such as vouchers for going back to the office, incentive payments for vaccinations or the provision of mental health and wellbeing services.
- Redundancy payments.
Contract and legal costs including:
- Costs for terminating contracts, including any settlement payments for breach of contract.
- Legal costs incurred in contractual or employment disputes.
Assets and equipment costs including:
- Repairs and maintenance on assets or equipment not being used due to Covid restrictions or a temporary reduction in business activities.
- Re-activating costs so equipment can be put back into use.
- Ongoing depreciation loss for depreciable assets that are not being used due to Covid restrictions or a temporary reduction in business activities.
- Security costs.
Premises expenses including:
- Payments made to terminate a lease (by the lessee).
- Incentive payments to encourage new tenants (by the lessor).
- Additional costs incurred to keep teams appropriately distanced within a workplace, including changes to relevant fit-out (such as erecting barriers).
I would suggest that the doc is a good read in terms of general principles surrounding the claiming of these types of expenses even in a non-Covid world (it’s getting harder to remember what that was like!).
The final four (and a bit) pages are dedicated to useful examples on applying the statement’s commentary.
If you’d like to make a comment and have your say prior to the document being finalised, then the closing date for submissions is 30th March 2022.
Clean car discount
Just in case the issue was keeping you awake at night, the Land Transport (Clean Vehicles) Amendment Bill has recently been passed, and amends the Income Tax Act 2007 by inserting a definition of the clean vehicle discount scheme into section YA 1. Schedule five (which deals with the fringe benefit values of motor vehicles) has been amended to clarify that, for fringe benefit tax purposes, the cost of the vehicle in relation to which a payment under the clean vehicle discount scheme is received by the owner, is net of the amount of the payment. The amendments to the Income Tax Act are deemed to have come into force on 1 July 2021.
Just for the ‘did you know? box’, apparently a full charge of a low/zero emission vehicle costs the equivalent of buying petrol at around 40 cents per litre – imagine that!
I can feel the excitement already building – Budget 2022 will be delivered on Thursday, 19 May 2022.
Our esteemed Minister of Finance has said that the Budget would include a focus on the Government’s health reforms and investing to meet New Zealand’s climate change goals.
No mention of any tax changes… yet…
This article from the ‘A Week in Review’ newsletter was originally published Monday 21st February 2022. If you have any questions or would like a second opinion on any national or international tax issues, please contact me firstname.lastname@example.org.
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