Fully deductible expenditure

(Clause 19)

Summary of proposed amendments

Expenditure will be fully deductible if it is incurred only to derive income from the asset and delivers no private benefit, or is incurred to meet regulatory requirements.

Application date

The amendments will apply from the beginning of the 2013–14 income year.

Key features

Expenditure will be fully deductible under section DG 7 if it relates solely to using the asset for deriving income and is either:

• incurred to earn income, and cannot reasonably be expected to deliver any private benefit – for example, advertising expenditure; or
• a reasonable amount and incurred to meet a regulatory requirement that enables the owner to earn income from the asset and would not have been incurred but for the requirement. For example, if all the conditions are met, Maritime New Zealand survey costs that boat owners must incur so they can charter out their own boats would be fully deductible under this rule.

Expenditure that is fully deductible does not include expenditure on repairs and maintenance.

Background

It is intended that the majority of expenditure incurred in relation to assets subject to the new rules will be apportioned. However, there are circumstances when apportioning expenditure would be inappropriate. For example, the costs associated with advertising an asset for rental use deliver no material private benefit and therefore should not be apportioned. Consequently, these costs will remain fully deductible. However, any costs that can be reasonably expected to deliver a private benefit, such as installing a new television, will not be fully deductible. Expenses of this type will typically be apportioned or a deduction will be denied completely if they only deliver a private benefit.

Some costs must be incurred to meet regulatory requirements in order to earn income from an asset. For example, certain boats must undergo Maritime New Zealand surveys before the boat is legally allowed to be chartered out. These costs would not normally have been incurred but for the income-earning use of the asset. Consequently, these costs will be fully deductible. However, these costs cannot exceed what would normally be considered reasonable to meet these requirements, nor will they be fully deductible if the owner would have incurred the cost anyway. For example, if an owner of a boat purchases equipment required by regulation in order for the boat to be chartered, and the items purchased are of a higher quality than required under the regulations (and therefore more expensive), the owner can claim a full deduction for the amount up to the amount that is reasonable to meet the requirement for the equipment. The additional cost would be apportioned, as discussed later in this Commentary.