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.
From the start of the 2020/21 tax year, depreciation deductions on industrial and commercial buildings, including motels and hotels, were reinstated. The diminishing value rate is 2% and the straight line rate is 1.5%.
The depreciation rate for non-commercial and non-industrial buildings with an estimated useful life of 50 years or more remains at 0%.
Prior to 17 March 2020, assets with a cost of less than $500 were immediately deductible in the year of purchase. This low-asset threshold was increased to $5,000 for the twelve months from 17 March 2020. From 17 March 2021, this threshold will reduce to $1,000.
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.
Residential rental expenditure
From 1 April 2019, deductions for expenditure incurred in relation to residential rental properties are limited to the extent of the residential income derived. Any excess expenditure is “ring-fenced” and available to carry forward to offset against future residential rental income, but generally, will not be available to offset against other income streams.
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 respect of breaches 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. Losses of a subsidiary are preserved on a spinout (i.e. when shares in the subsidiary are transferred to shareholders of its parent company). The government has announced that they will relax the rules to carry forward tax losses by supplementing the existing 49% shareholder continuity requirement provision with a “same or similar business” test (similar to Australia) from 1 April 2020. If a loss company cannot carry forward it's tax losses due to a loss of shareholder continuity, it may still be able to carry forward those tax losses if it maintains a same or similar business. The new rules have not been introduced to Parliament yet despite the intention to apply them from 1 April 2020.
In response to COVID-19, the government introduced a temporary loss carry-back regime for businesses that incur tax losses in the 2020 or 2021 year. The regime allows such businesses to carry back the losses to the immediate preceding tax year (i.e. to 2019 or 2020, respectively), thereby allowing the business to obtain a tax refund comprising previous tax paid. Officials have indicated that a permanent scheme to replace these temporary rules is under development.
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 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.