Depreciation and depletion
For tax purposes, depreciation of property can be computed under the diminishing-value method, the straight-line method, or a pooling method. The rates of depreciation depend on the following factors:
- Type of asset.
- Whether the asset is acquired new or second-hand (i.e. used).
Taxpayers must use the economic depreciation rates prescribed by Inland Revenue. Fixed-life intangible property (including the right to use land and resource consents) is depreciable on a straight-line basis over its legal life. Any depreciation recovered on the sale of an asset (up to its original cost) is taxable in the year of sale.
The depreciation rate for buildings with an estimated useful life of 50 years or more is 0% as of the 2011/12 income year.
Goodwill is generally regarded as a capital asset, thus any payment for goodwill is non-deductible. There is a limited exception for payments made to preserve goodwill.
Expenses incurred by a company before the commencement of the business are generally regarded as outgoings of a capital nature that do not have a sufficient nexus with income and are therefore not deductible. However, certain expenditure on scientific research may be deductible, provided that it is incurred for the purpose of the company deriving assessable income.
Research and development (R&D)
R&D costs are generally tax deductible. However, expenses written off as immaterial and not tested against certain asset-recognition criteria are not automatically deductible for tax purposes.
Unsuccessful software development costs
Taxpayers are allowed a deduction for expenditure incurred on unsuccessful software development projects in the year that the development is abandoned.
Generally, interest incurred by most companies is deductible, subject to thin capitalisation, restricted transfer pricing, and anti-hybrid rules (see the Group taxation section).
A company that carries on a business of holding or dealing in financial arrangements is generally allowed a deduction for bad debt in the income year in which the debt is written off by the company if the debt that is written off is a financial arrangement of the same or a similar type as the financial arrangements held as part of the company’s business, and the company is not associated with the debtor.
A company is generally allowed a deduction for charitable contributions it makes to an approved Inland Revenue donee organisation or a charity that performs its activities in New Zealand. The list of approved donee organisations is available on Inland Revenue’s website. The deduction available for charitable contributions is limited to the company’s net income for that income year.
Entertainment expenditure is generally only 50% deductible. However, entertainment expenditure incurred overseas is 100% deductible.
Legal expenditure is deductible if the expenditure is:
- incurred in deriving assessable or excluded income or
- incurred in the course of carrying on a business for the purpose of deriving assessable or excluded income.
However, the expenditure is not deductible if it is of a capital, private, or domestic nature.
Taxpayers with business-related legal expenditure of NZD 10,000 or less are able to deduct the full amount of the expenditure in the year it is incurred, whether or not it is capital in nature.
Fines and penalties
Generally, no deduction is available where a company has incurred expenditure on fines or penalties paid in breach of statute or regulation. Expenditure on other fines and penalties requires further evaluation before its deductibility can be determined.
FBT is deductible, as is GST payable on the value of a fringe benefit.
Net operating losses
Losses may be carried forward indefinitely for offset against future profits, subject to the company maintaining 49% continuity of ownership. There is no loss carryback. Losses of a subsidiary are preserved on a spinout (i.e. when shares in the subsidiary are transferred to shareholders of its parent company).
Payments to foreign affiliates
A New Zealand corporation can claim a deduction for royalties, management service fees, and interest charges paid to non-resident associates, provided the charges satisfy the ‘arm’s-length principle’, which forms the basis of New Zealand’s transfer pricing regime.
The new hybrid and branch mismatch rules eliminate tax benefits arising (whether in New Zealand or elsewhere) from an entity or financial arrangement being treated differently for tax purposes by different countries. Broadly, the rules could apply where:
- a group company in one jurisdiction is allowed a deduction (or is not taxed on receipt) in relation to an instrument that is classified differently in another jurisdiction
- a group company is classified differently in two jurisdictions, giving rise to double deductions or deductions without income pick up, or
- a payment from New Zealand is not of a hybrid nature, but it funds a further payment that gives rise to a mismatch.
If the rules apply, deductions may be disallowed or taxable income increased. The hybrid and branch mismatch regime will take effect for financial years beginning on or after 1 July 2018.