As you may be aware at the start of this year Inland Revenue is looking closely at real estate salesperson/agent-customer groups. They have identified that these groups are claiming a high level of expenses relative to their income. IRD’s records suggest some of these customers are claiming private expenses and are not keeping logbooks or retaining other business records to support a deduction.
Their initial approach was to raise awareness and provide educational tools to encourage customers to do the right thing from the start. And now they are moving into the next phase of this campaign, by identifying those customers that fall outside industry norms. If they are concerned someone has overclaimed expenses or they identify other compliance risks, they will start asking to review tax returns and request records to support expenses claimed.
How does the IRD know this?
When we, as tax agents, file tax returns for a business, we are obliged to include a schedule showing income, expenses, assets, and liabilities. From there, Inland Revenue collates and analyses the data, comparing it to previous years and to other sectors.
They also track information from GST returns – comparing them against industry averages and your income tax return.
So what business expenses can you claim?
Clothing and grooming expenses
You can claim “distinctive work clothing” such as a uniform with a logo. × You can’t claim a deduction for the cost of buying or cleaning plain clothing worn at work, even if your agency tells you to wear it and even if you only wear it for work, for example, black pants and a white shirt. × You can’t claim a deduction for hairdressing, cosmetics, hair and skin products, vision or sunglasses, even if your agency tells you to use them, or you are required to be well-groomed.
Home office expenses
You can claim expenses for your home office if you work from home. You need to calculate the square metres of your house used for business use. If the area is shared for business and personal use, you need to take into consideration the time spent on income-earning activities. You claim a percentage of your home expenses relative to the percentage of your house used for the office
Meal expenses
You can’t claim a deduction for personal meal and beverage expenses. You can claim a 50% deduction for a business lunch/dinner as this is an entertainment expenditure.
Gift expenses
The gift must have a link to earning your income. You can fully or partly claim gift expenses depending on the type of gift, for example, only 50% of gifts for food and drink can be claimed. The following information should be kept supporting your expense deduction:
- Record of dates of gifts and expenses incurred.
- The names of the individuals to who the gifts were given.
- The business they represent (if any) and the position they hold.
- The reason for the gift.
- Whether the gift related to the purchase or sale of a property.
- The address of the property being considered for purchasing or purchased or for sale or sold.
- All invoices to support the deduction
Entertainment expenses
You can fully or partly claim entertainment costs as an expense but there must be a clear link to earning your income. × You can’t claim entertainment expenses for family or friends. The following information should be kept supporting your expense deduction: • Record of dates of entertainment and expenses incurred. • The names of the individuals who the entertainment related to. • The business they represent (if any) and the position they hold. • The reason for the entertainment. • Whether the entertainment related to the purchase or sale of a property. • The address of the property being considered for purchasing or purchased or for sale or sold. • All invoices to support the deduction.
Vehicle expenses
You can claim business travel when you drive to and from an alternative workplace for the same agency on the same day – for example travelling between two different residential open homes. × You generally can’t claim the cost of trips between home and work, even if you live a long way from your usual workplace or must work outside normal business hours. In limited circumstances you can claim business travel between home and work. Please refer to our detailed explanation in IS3448 Travel by motor vehicle between home and workdeductibility of expenditure & FBT implications. You can claim business vehicle expenses. If the vehicle is used for both business and personal use, you need to keep a logbook or actual records to determine the percentage of business use.
Other common deductible Work-related expenses
Other expenses you can claim a deduction for include: • advertising & marketing • stationery • renewal of REA license • accounting fees/accounting software • ACC levies • wages paid to PA’s/salespeople by you • ongoing training including the cost of seminars, conferences that directly relate to your work as a real estate salesperson/agent.
Summary
- Inland Revenue is monitoring expenses claimed by real estate agents. Keep receipts in a safe physical location and/or in the cloud and/or in your accounting system.
- There is no “one size fits all” when it comes to business expenses
- There is sometimes a certain level of subjectivity on the deductibility of some expenses
If you are in any doubt about the topics covered here, please get in touch with me at philip@itoaccounting.co.nz, I would be more than happy to help.
