Self-employed tax deductions in the spotlight
Tax Alert - December 2022
By Kirsty Hallet & Rosie Fresen
Inland Revenue is keeping a close eye on expenses claimed against income earned by Independent Contractors. Are you claiming expenses correctly and what does a recent Inland Revenue decision mean for you?
Following in the footsteps of IS 21/06 – Income Tax and GST – Treatment of meal expenses released mid-last year which concluded that a self-employed person cannot claim a deduction for meal expenses on the basis these are inherently private in nature, Inland Revenue have now released a tax technical decision summary (TDS) which disallowed deductions claimed by a self-employed person on travel, accommodation and meals while working away from home.
This decision follows Inland Revenue’s recent theme of placing increased focus on compliance of small self-employed taxpayers. They have 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.
Going forward, it is becoming critically important that documentation is in place to support the basis for deducting business expenses incurred by a self-employed person that could be viewed as being private in nature referencing the need for the expenditure in the course of undertaking the contracting activity.
Overview of the TDS Decision
A TDS is a sanitised technical decision made by Inland Revenue on a specific set of taxpayer facts, therefore they are of less precedential value than an interpretation statement or other formal statement. Nevertheless, a TDS provides useful guidance as to how Inland Revenue will apply interpretations.
This TDS decision concerns an individual involved in more than one venture. The Taxpayer operates a farm on their property as a self-employed person and also earns schedular income from undertaking work as an independent contractor. The Taxpayer was required to undertake the contracting work in a different city to where they ordinarily resided and sought to claim deductions for expenses incurred on travel, meal and accommodation costs against their schedular income.
Travel and Accommodation Expenses
Inland Revenue denied the Taxpayer a deduction for their travel and accommodation costs on the basis that the travel took place between the taxpayer’s home and a different city where they went to derive their schedular income. As the nature of the work undertaken at each location was unrelated and travelling between the two cities was not required while the Taxpayer was engaged in undertaking either activity, the deduction was denied. Rather Inland Revenue viewed the costs as having been incurred to put the Taxpayer in a position where they could undertake their activity from which their taxable income would be derived. In relation to travel, 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.
Consistent with the position in IS 21/06, deductions for meal expenses were denied on the basis that these are of a private and domestic nature and although there was an extra cost associated with the meals while away from home (as compared to the cost of meals at home), this was not as a result of a requirement of the Taxpayer’s contracting work.
What does this mean for you?
While the decision itself may not be in dispute in the taxpayer’s context, it does raise a series of questions for taxpayers operating as self-employed persons, particularly in an increasingly mobile world where the boundaries between home and work/private and business have become increasingly blurred. It would seem a higher burden of proof is being applied by Inland Revenue in this context to support deductions than would likely be the case for a company providing allowances or reimbursements for employees which in many cases would be able to be provided tax-free.
As many independent contractors will attest to, the nature of their work can often require them to travel and/or spend time away from home as part of undertaking their contractual activity. In these cases, many would claim the costs of travel, accommodation and meals while away from home as deductible business expenses on the basis that the costs have been incurred in the course of undertaking their taxable activity or incurred in deriving their assessable income and are not of a private or domestic nature.
We expect many situations can be differentiated from the facts of this particular case, for example, if the taxpayer usually worked from home and had to visit the client site for meetings once a week in another town. In this situation, they are travelling from their usual place of work (home) to the client site in the course of deriving income. Travel, accommodation, and meal costs are necessary expenses as a result of the business trip and our expectation is a deduction may be supported in this case.
Operate with Caution! Taxpayer Beware
Previously Inland Revenue has not focused heavily on deductions for individuals. This example, along with other recent rulings, is showing a trend towards Inland Revenue starting to look more closely into deductions claimed for individuals.
The case references documentation to support the basis for the claims and serves as a reminder to be vigilant about keeping a proper record of expenses incurred when travelling for business including the reasons they are being incurred. Where deductions are being claimed for expenses that could in essence be viewed as private in nature or putting you in a position to generate taxable income, documentation should be put in place at the time they are incurred outlining why the costs are being incurred as part of carrying out your business activity. This will help to support your positions should Inland Revenue review your position down the track.
If you have queries about what is deductible against your taxable income it is important to be speaking with your usual Deloitte advisor.