People who are self-employed are being warned Inland Revenue is paying increasing attention to the expenses they claim to lower their tax bills.
Deloitte tax partner Robyn walker said the department was increasingly focusing on the “appropriateness” of tax deductions claimed by self-employed people.
People who are self-employed can claim expenses they incur in the course of their work against their income, to reduce their tax bills.
But Walker said there were more questions being asked about the boundary between what was a business expense and what should have been a private expense.
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It is not possible to claim a deduction for private expenses.
“These same issues don’t arise for businesses which are run through companies as there are different methods of dealing with expenses where there could be a private element – for example, food and drink expenses may only be 50% deductible under the entertainment rules or benefits provided to owners are either subject to fringe benefit tax or a dividend.
“In 2021 we saw Inland Revenue release a long statement explaining why meal expenses were not deductible for self-employed individuals.”
She said the department had also more recently released a technical decision summary explaining a dispute between it and a taxpayer.
In that case, the person involved operated a farm on their property as a self-employed person and also earned income as a contractor, working in a different city.
They wanted to claim deductions for expenses incurred on travel, meals and accommodation costs against their contracting income.
Inland Revenue said the person could not claim the travel and accommodation costs because the nature of the work undertaken in each location was unrelated and the travel was not part of either the contracting or the farm work.
“The costs were viewed as travel ‘to one’s work’ and ‘from one’s work’, as opposed to ‘on work’ for either activity. Inland Revenue concluded that the expenses incurred by the taxpayer did not satisfy the statutory nexus with the income-earning activity and were incurred as a result of the taxpayers’ personal preferences rather than as a result of the nature of the contracting work.”
It also said that meal expenses could not be claimed because they were private and domestic, and although there was an extra cost associated with meals away from home, that was not a requirement of the contracting work.
“The key message is for people to stop and think about what deductions are claimed,” Walker said.
“During the Covid-19 period Inland Revenue’s focus has been on delivering much needed support to business, and as such there has been less audit activity. However, Inland Revenue are now focused on getting back to business as usual.”
She said Inland Revenue clearly had an increased focus on compliance of small self-employed taxpayers. “It has been imposing stricter requirements to support the basis for deductions than many taxpayers will be accustomed to. This has the potential to further diverge the treatment for travel, accommodation and meal costs incurred by a self-employed person from that for employers and employees.”
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