Comical Australian employee deduction case highlights New Zealand’s pragmatic rule
Tax Alert - March 2016
By Brad Bowman and John Lohrentz
New Zealand’s Income Tax Act 2007 provides for an employment limitation, which denies a deduction for expenses incurred in deriving employment income. This means salary and wage earners are generally prevented from claiming deductions for expenditure incurred in deriving their salary and wages (i.e. employment income).
In contrast, Australia’s tax rules do not have an equivalent employment expense limitation rule and the recent, highly amusing, Australian case of Ogden v Commissioner of Taxation highlights the issues that can arise as a result and a stark difference between New Zealand and Australia’s tax rules.
The Ogden case
Mr Ogden was employed by IBM as a professional sales commission agent. He was paid a base salary which was supplemented by sales commissions and incentives. Largely working from home, he would spend much of his time travelling to clients. If he had to go into IBM’s premises to work, he would make do with a hot desking arrangement. Over a period of two years Mr Ogden claimed a wide range of work-related and home office expenditure as deductible, including:
- Secretarial services of AU$5,388 provided by Mr Ogden’s seven year old son. The Court held that these services amounted to no more than his son running up the stairs when the phone was ringing;
- Costs for overtime meals which included popping down to the local St George leagues Club which it turned out was a five-minute drive from his home; food acquired at a BP service station on the way to a family vacation to the snow which Mr Ogden felt justified in claiming because he had worked over 10 hours that day;
- Rubber soled shoes to prevent static electricity from destroying his laptop;
- Stationery, including a “Dora the Explorer” pencil case, heart and star shaped stickers, crayons and art brushes;
- AU$1,000 of batteries for his small office calculator;
- The family groceries acquired on the day his tax agent visited (which were claimed as a cost of preparing the tax return); and
- Claims for sunscreen and sunglasses because he was in the sun for six hours a day when travelling in his car on business.
The dialogue is very entertaining as the Court explores Mr Odgen’s reasons for claiming the expenditure. However, the Administrative Appeals Tribunal of Australia (“AATA”), unsurprisingly upheld the Commissioner’s denial of these deductions claimed by Mr Ogden as they were “private expenditure, pure and simple”. The AATA also referred back to the Commissioner, the issue of whether a shortfall penalty should be assessed on the basis that Mr Ogden failed to take reasonable care when complying with tax law.
New Zealand’s pragmatic rule
As highlighted by the Ogden case, the Australian approach of allowing deductions to be offset against employment income, while beneficial for taxpayers, does result in increased compliance costs for taxpayers, increased resource and policing requirements by tax authorities and the Courts. By way of contrast, New Zealand phased out the ability to claim tax deductions relating to employment income in the mid 1990s. One exception to the rule is that taxpayers are permitted to claim tax return preparation fees against employment income, but most taxpayers earning only salary and wages are not required to file tax returns in any event. The inability to claim deductions against employment income has certainly resulted in a much simpler tax system and the reason why equivalent cases do not come to court in NZ. Prior to the change, our case history is littered with many Taxation Review Authority decisions arguing deductions for employment related expenditure.
Recent press reports in Australia hint at the possibility that the Australian Government may be looking at options to simplify tax returns and the work-related tax deduction system. It remains to be seen whether Australia will look to follow New Zealand’s lead on this issue.
For further information, please don’t hesitate to contact your usual Deloitte advisor.
Tax Alert March 2016 Contents:
- Inland Revenue audits are fun and friendly! – Or so Inland Revenue’s latest video suggests
- Peering into tax: bad debts and P2P lending
- Engaged in R&D? The R&D loss tax credit regime is a go!
- What information should you file with your tax return?
- Comical Australian employee deduction case highlights New Zealand’s pragmatic rules