Meal expenses… Deductible?
IR has issued a draft interpretation statement reflecting the Commissioner’s views on the GST and income tax treatment of meal expenses for the self-employed.
Titled PUB00361, the 38-page document commences with a discussion on the ‘general permission’ (which would need to be satisfied in the first instance to support a deduction claim), and its relationship with the ‘private limitation’ – which like the schoolyard bully, takes the deduction entitlement away, just when you thought you had one!
This initial commentary covers the first 15 pages of the IS, and goes into some detail to reflect the various case law decisions on the topic, the final conclusion being that in general, meal expenses incurred by a self-employed person are non-deductible because they are of a private or domestic nature. The only exception for which there is convincing authority (also known as, case law) is where the income earning process of the taxpayer requires extra meal expenses in which case that extra element will be deductible.
I would suggest that a read of PUB00361 is useful regardless of whether or not meal expense deductibility is at the top of your “I’m not so sure” list, as it provides some insight on the Commissioner’s likely response to many a client’s initial statements, that the gym membership or day-care costs must be tax deductible because it was a necessary cost to enable them to derive their income (thereby satisfying the ‘general permission’) – that the expenditure is still of a private or domestic nature, and consequently deductibility is denied by the private limitation.
In this regard, the IS states that an outgoing is of a private or domestic nature if it is “exclusively referable to living as an individual member of society and domestic expenses are those relating to the household or family unit”. Now this statement itself is not overly helpful in responding to your client’s pleads in relation to their ‘gym’ or ‘day-care’ deduction desires, however the following extract from the C of IR v Haenga (1985) decision may help to explain the position more clearly – “If sec 105(2) and cl 8 stood unqualified, they could permit deduction of expenditure on matters such as food, clothing, medical expenses, travel, and shelter. All, in a broad sense, would be incurred in gaining assessable income, or for the purposes of employment. One does not gain assessable income, or hold employment if starving to death, or dying from disease or exposure. On a sine qua non approach, the logic would be unanswerable… The policy solution is prohibition of so-called personal or domestic expenditure. To say food, clothing, or shelter or the like is an essential requirement for the purposes of gaining an income might remain logical, but it is not generally to be legal. A line is to be drawn, placing beyond the pale that which ‘properly’ is expenditure of a personal or domestic nature. No statutory definition is given. Obviously, there will be borderline cases involving line drawing. The Courts are expected to do so in a manner which promotes this statutory object.”
While the focus of PUB00361 is on the self-employed, IR also considered it necessary to insert some commentary into the document, as to why a self-employed persons meal expenses may be non-deductible, yet in the same scenario had they operated via a company and been an employee of the company, or as a self-employed person they were paying for employee meals, the expenditure would be deductible – a difference in treatment which was once summed up by Judge Moore’s comment – “a degree of commercial unreality which is approaching the comic”. I’ll leave it to you to read the IR’s commentary and form your own views as to whether the difference in treatment makes sense.
The income tax discussion in the IS concludes with a brief commentary on the entertainment expenditure rules contained within subpart DD of the Act.
Three pages are then dedicated to the GST aspects of the meal expense deduction issue, but in essence, the income tax treatment will usually dictate the GST input tax claim position, and the final seven pages of PUB00361 contain examples to illustrate IR’s views.
Should you wish to have your say on the draft document, you should do so no later than 27th May 2021.
Deemed dividends interpretation statement
Slightly shorter than our previously discussed document at 22 pages, is IR’s draft IS titled PUB00362, covering the topic of deemed dividends. However, I would also suggest that it is a shorter document, because it certainly lacks the detail that PUB00361 contained, and you may come away from reading it with the feeling that you have been short changed with many of your questions perhaps still unanswered, so be warned in that regard (although arguably all you need is to understand the potential ‘trigger’ and you can then go in search of the detail when the alarm goes off in your head).
Hopefully most of you will be aware of the deemed dividend concept and when to be ‘on guard’ so the potential negative outcome for your client (non-deductible to the company/assessable income to the shareholder) will not be overlooked.
So three basic questions to ask yourself:
- Is there a transfer of value from the company to the shareholder (or an associated person of the shareholder)? Now this transfer can be either money or money’s worth.
- If yes, then did that transfer occur because of the shareholding relationship? In other words, would the company have done the same thing (provide an interest free loan for example) with a non-associated person.
- If yes, is there any legislative exclusion that will negate an otherwise deemed dividend conclusion? (note that the IS is not a one stop shop here, as it does not cover all exclusions)
PUB00362 commences with this ‘transfer of value’ discussion and includes five examples to illustrate the concept, with a subsequent three examples to then explain the ‘caused by a shareholding’ element.
Once you have concluded that a deemed dividend does exist, then its suggested that the general rule for calculating the dividend amount is relatively easy – just take the value from the company and minus from that amount the value provided to the company in return by the person. The dividend is then usually deemed to have been paid on the date the transfer of value takes place.
Where the company is making property available to a person, the calculation rules and deemed timing of the dividend payment are slightly different however. Fringe benefit values are usually used to calculate the dividend amount on a quarterly basis, and a single dividend is deemed to have been paid on a date six months post the end of the company’s income year.
The draft IS also confirms that where the person is both an employee of the company and a shareholder, and has received an unclassified benefit (for FBT purposes), then the company can elect whether a dividend or fringe benefit has arisen.
Once again if you want to have your say, make sure you do so also no later than 27th May 2021.
This article from the ‘A Week in Review’ newsletter was originally published Monday 3rd May 2021. 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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