Week 2 Flashcards
What are deductions?
An amount is a deduction of a person if they are allowed a deduction for the amount under Part D (Deductions).
When is a person allowed to deduct for an amount under part D?
- The amount satisfies the General Permission; and
- A General Limitation does not deny a deduction for the amount
OR - A specific provision in Part D allows a deduction for the amount
What is the General Permission?
A person is allowed a deduction for an expenditure or loss, including depreciation, to the extent that the person incurred the expenditure or loss in:
Deriving the person’s assessable income and/or excluded income (“the first limb”); OR
The course of carrying on a business for the purpose of deriving the person’s assessable income and/or excluded income (“the second limb”).
How to satisfy general permission?
- Must be an expenditure or loss
- Requires a monetary outlay
- Must be an expense of the person
- Must be outlay by person claiming deduction
- Must be nexus with person’s assessable or excluded income
- Must be connected to income of person claiming deduction
- Direct connection to income; or
- An outlay of the person’s business
General Permission - First Limb
Deriving the person’s assessable income and/or excluded income.
General Permission - Second Limb
The course of carrying on a business for the purpose of deriving the person’s assessable income and/or excluded income.
What are the general limitations
- The General Limitations deny deductions for expenditure
- of a particular nature; or
- incurred in deriving income of particular nature
- The General Limitations are
- The Capital Limitation
- The Private Limitation
- The Exempt Income Limitation
- The Employment Limitation
- The Withholding Tax Limitation
- The Non-Residents’ Foreign-Sourced Income Limitation
The private limitation
- Deduction denied for expenditure TO THE EXTENT it is of a private or domestic nature?
Private expense
Exclusively referable to living as member of society
Domestic expense
Relate to the household or family unit
- Examples
- Clothing/Meals/Medical-costs
- Household expenses
The exempt income limitation
- Deduction denied for expenditure to the extent it is incurred in deriving exempt income
- Exempt income is not assessable income
- No deduction allowed for expenditure incurred in deriving
- Example
- Charity operating Op Shop
- Charitable purpose in NZ = exempt income
- Charitable purpose outside NZ = assessable income
Exempt income
Exempt income is tax free and no deduction on deriving exempt income is allowed
The employment Limitation
- Deduction denied for expenditure to the extent it is incurred in deriving income from employment
- Income from employment
- Salary and wages
- Bonuses and extra pays
- Examples
- Suits for work
- Work shoes
- Cost of travelling to work
The Withholding Tax Limitation
- Deduction denied for expenditure to the extent it is incurred in deriving non-resident passive income
- Non-resident passive income = NZ - sourced income of non-resident that is
- Dividend
- Royalty; or
- Interest (most, but not all)
- Assessable income, but not fully taxed
- Rate of tax = 0%, 15% or 30%
Non-Residents’ Foreign-Sourced Income Limitation
- Deduction denied for expenditure to the extent it is incurred in deriving non-residents’ foreign-sourced income
- Non-resident’s foreign-sourced income ≠ assessable income
- No deduction allowed for expenditure incurred in deriving it
- Example
- Non-resident borrows money for business in NZ & Aus
- Income from NZ business = assessable
- Income from Aus business = non-assessable