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Deductibility of self-employed expenses

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Recently, the IRD has released guidance on the tax treatment of expenses incurred by self-employed contractors.

For the self-employed, it’s a pertinent reminder of the distinction between deductible and non-deductible.

In July 2021, the IRD released an interpretation statement IS 21/06, outlining the income tax and GST treatment of meal expenses incurred by self-employed persons. This has since been reaffirmed with the recent release of technical decision summary (TDS) TDS 22/18, which delves into the implications of meal, travel and accommodation cost deductibility. 

The case discusses a taxpayer who operated a farm while also doing contract work in another city. As there was a requirement for the worker to be on site for the job in another city, costs were incurred for travel back and forth between the farm and the city and for rental accommodation in the city. The IRD examined whether deductions should be allowed for the cost of the trips between the city and the farm, the cost of meals in the city, and accommodation expenses in the city. 

With regards to meal expenses, a company would ordinarily be able to deduct these, subject to the entertainment rules. However, when it comes to self-employed contractors, the risk that the meals constitute a significant private element increases. IS 21/06 made it clear that, in general, self-employed individuals cannot deduct meal expenses. The IRD takes the view that anything a member of society pays for during the course of normal life is inherently private and therefore no deduction can be taken. For example, where a contractor pays for meals and coffee while working in a different city, this is deemed to be private and non-deductible. An exception exists where expenditure on food is “extra”. This can occur where the nature of the work restricts to the point that spending over and above what is standard is needed. Simply working out of town isn’t enough for this distinction, but it may be allowed if the location is remote, or the hours are unusual. As for the taxpayer, in this case their meal expenditure was deemed non-deductible given that no extra cost could be proved, and all meal expenses were part of ordinary consumption.

A similar conclusion was reached concerning travel and accommodation expenses. Section DE 2 of the Income Tax Act 2008 allows a deduction for the business use of a motor vehicle. However, it is well established that travel from work to home is generally considered private use, provided the work is not required to be performed partly at home. In this case, the taxpayer was travelling from one workplace to another. Because they were travelling between two unrelated places of work, the cost of travel could not be said to be incurred while deriving income from either workplace. Had the taxpayer been required to travel from one location to another as part of their work duties for one specific job, these costs would have been deductible. The taxpayer was also denied a deduction for their accommodation. As with meal expenses, accommodation is seen as a necessary expense to live in society and, as such, private in nature. Although the work required the taxpayer to be in a location away from home, it did not have a sufficient connection to the income producing activity, as the accommodation costs were a result of the taxpayer’s personal preference to work in that city.

So what does this mean? In general, the distinction between deductible and non-deductible is largely determined by the connection to the individual’s income earning activity. In order to be deductible, the expense must arise specifically as a result of the work performed, as opposed to being incidental to the income earning activity.

Taxpayers should ensure they have adequate documentation to support their deductibility claims, and note that the GST treatment of these expenses usually follows the income tax treatment.

Tax laws are complex and constantly changing. We love working with our clients to solve a wide range of tax issues.

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About Author

Tracey Clark

Tracey Clark is a PwC director based in the Waikato office. Email: tracey.e.clark@pwc.com