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LAWCOMM 403 long notes.docx
LAWCOMM_403_long_notes.docx
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LAWCOMM 403 long notes.docx-CONTENTS Tips ...........
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
LAWCOMM 403 long notes.docx-CONTENT...
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
Page 83
DA 1
General permission
(1)
A person is allowed a deducon for an amount of expenditure or loss, including an amount of depreciaon loss, to the
extent to which the expenditure or loss is
—
(a)
incurred by them in deriving—
(i)
their assessable income; or
(ii)
their excluded income; or
(iii)
a combinaon of their assessable income and excluded income; or
(b)
incurred by them in the course of carrying on a business for the purpose of deriving
—
(i)
their assessable income; or
(ii)
their excluded income; or
(iii)
a combinaon of their assessable income and excluded income.
Expenditure is deducble to the extent that it is incurred:
o
in deriving assessable income; or
o
in the course of carrying on a business for the purpose of deriving assessable income
This part of the test is generally redundant because the first limb is very broad and generally covers
expenditure incurred in the course of business for the purpose of deriving assessable income
However, the second limb could be seen as broader than just “deriving assessable income”
If you borrowed money and invested it in a company paying dividends, and pay interest on
the loan, this will probably not be “carrying on a business”, but will be deducble as it is
incurred in deriving assessable income
In the contrary,
you might not have derived any assessable income in a tax year, but sll be
carrying on a business for the purpose of deriving assessable income
– in this case, you will
be making a net loss which you can carry forward
To “carry on a business”, you need an intenon to make a profit, and carry on a business-like acvity
(
Grieve v CIR
)
Secon BD 1 applies to expenditure relang to assessable income, but it also applies to:
o
Losses
(e.g. a bad debt that is owed to the taxpayer but they expect not to receive and writes it off is not
expenditure, but it is a loss that is deducble)
o
Depreciaon losses
(the loss in value of an asset over me, such as cars, buildings and technology)
o
Expenditure relang to excluded income
(e.g. GST or FBT)
WHAT DOES “INCURRED” MEAN?
“Incurred” means the taxpayer is definively commied to the expenditure – but an expense can be incurred before
the money is actually spent
Commissioner of Inland Revenue v Mitsubishi Motors Ltd
[1995] 3 NZLR 513 (PC)
o
Facts
Mitsubishi sold through dealers and had a warranty clause for defects – if the car was faulty, the
dealer will fix it without any cost to the customer, but Mitsubishi was to pay for the costs
Mitsubishi predicted with a high degree of accuracy that 63% of cars would have defects within the
warranty period
o
Submissions
Mitsubishi argued that they claimed a deducon for the ancipated cost of servicing the cars within
the next financial year
o
Judgment
Companies can create a “provision” for ancipated expenditure – it is a method of quanfying your
profit by taking into account ancipated expenses that will become expenses later on
When trying to work out net profit in an income tax year, if you ancipate that you are going
to have an expense, you might create a provision for that expenditure – you are basically
making a charge against your profit (reducing your profit) and your balance sheet accounts
for this
When you actually come to spend the money, you bring it out of the balance sheet, and it
doesn’t affect profit/loss in the second year
Before this case, most provisions were not deducble because they are not certain
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