Inland Revenue’s Scrutiny of Expense Claims for Independent Contractors


Inland Revenue is closely monitoring expenses claimed by independent contractors against their earned income. It’s crucial to ensure that you are correctly claiming expenses and understand the implications of a recent decision by Inland Revenue.


Following the release of IS 21/06 last year, which concluded that self-employed individuals cannot deduct meal expenses due to their private nature, Inland Revenue has now disallowed deductions claimed by a self-employed person for travel, accommodation, and meals while working away from home.


This decision reflects Inland Revenue’s increased focus on compliance among small self-employed taxpayers. They are imposing stricter requirements for supporting deductions, which may diverge from the treatment for employers and employees regarding travel, accommodation, and meal costs.


Moving forward, it is critical to have proper documentation supporting the basis for deducting business expenses that could be considered private. This documentation should reference the necessity of the expenditure for the contracting activity.


Overview of the TDS Decision


A tax technical decision summary (TDS) has been released by Inland Revenue concerning an individual involved in multiple ventures. The taxpayer operates a farm as a self-employed person and also earns schedular income as an independent contractor. They claimed deductions for travel, meal, and accommodation expenses incurred while working in a different city than their residence.


Inland Revenue denied the deductions for travel and accommodation costs since the work in each location was unrelated, and travel between the two cities was not required for either activity. The costs were considered as incurred to enable the taxpayer to undertake their activity, rather than being directly related to the income-earning activity. Meal expenses were also denied since they were deemed private and not a requirement of the contracting work.


Implications for Self-Employed Individuals


While the decision may not directly apply to all taxpayers, it raises questions for self-employed individuals in an increasingly mobile world where the boundaries between home and work have blurred. Inland Revenue appears to be imposing a higher burden of proof for deductions compared to companies providing tax-free allowances or reimbursements to employees.


Many independent contractors frequently travel or spend time away from home for their contractual activity. They often claim travel, accommodation, and meal costs as deductible business expenses, arguing that these costs are incurred in the course of their taxable activity and not of a private nature.


Differentiating situations from the specific case is important. For instance, if a taxpayer usually works from home and occasionally visits client sites in another town for meetings, the travel from home to the client site may be considered a deductible business expense.


Exercise Caution and Maintain Proper Records


Inland Revenue has started focusing more on deductions claimed by individuals. This case emphasizes the importance of documentation to support expense claims. It is crucial to keep accurate records of business-related expenses, including the reasons behind them. When deducting expenses that could be viewed as private or related to generating taxable income, documentation should be maintained to justify the costs incurred in carrying out business activities. This will help support your position in case of an Inland Revenue review.



Your Outside Team

 

 

 Need a bit of assistance with your
business? Contact an Outside Accounting team member today and learn more about
our fixed fees. You won’t regret it.

Aside from business consultation, we are business accountants Wellington who
offer accountingbookkeeping, payroll services designed to
help you achieve greater financial success.

You can click here to speak to a businessaccounting and bookkeeping firm. We will give you a call to know more
about your needs. We will explain to you how we can improve your business.

 

 

Contact 

Wellington Accountants | 

Business Accountants | 

Construction Accountants 

Property Accountants 

Contractor Accountants 

Hospitality Accountants |

Property Developer Accountants | Accountants Wellington | Wellington Accountant | Restaurant Accountants | Cafe Accountants | Business Consultation | Business Adviser

AddressLevel 2, 182 Vivian Street,
Te Aro, Wellington 6011, New Zealand 

Mail: PO Box 24-457, Wellington 6142

Phone04 889 2975

New Zealand Accounting, Bookkeeping & Property Business Consultancy Services | Wellington & Lower Hutt Xero Property Accountants Business coach business consultation business adviser

Business Accountants: Exploring Business Structures: How to Choose the Right One for Your Venture

Embarking on the journey of entrepreneurship is exhilarating, but establishing the right business structure can be a daunting task. Whether you’re a solo entrepreneur or part of a larger team, understanding the different business structures and making the right choice is crucial for your long-term success. This guide aims to demystify the process and help you navigate the intricate world of business entities.

Read More »
New Zealand Accounting, Bookkeeping & Property Business Consultancy Services | Wellington & Lower Hutt Xero Property Accountants Business coach business consultation business adviser

Business Accountants: Optimising Your Business for Recession Resilience: Strategies for 2024

In the face of economic challenges, understanding how to recession-proof your business becomes paramount. A recession, marked by prolonged weak or negative growth in real GDP and heightened unemployment, demands strategic planning to weather the storm and emerge stronger on the other side. To fortify your business for the uncertainties ahead, consider the following comprehensive guide.

Read More »