New Zealand does not have the most liberal tax laws when it comes to making claims for work clothes. This is one thing that our cousins across the ditch are far more generous with.
There is a very narrow definition in NZ tax law and IRD interpretation as to what is a deductible business expense for work clothing. In order to help you avoid making expensive mistakes that could land you with an audit, back taxes, interest, penalties and even home detention, we’ve drawn up this simple list and handy explanation of the law that limits your claims. That’s right, its not just a grumpy accountant that won’t let you claim things, its actually the law.
What Work Clothes Can I Claim As A Business Expense?
If you want to claim for clothes that you (or your employees) wear to work the clothes must:
- Be a uniform that is distinctive to your business, or
- Prominently and permanently advertise your business, or
- Be necessary for protection in the workplace (e.g. protective eye wear, steel capped boots, etc.), or
- Be required for health and safety compliance on the work site (e.g. high-visibility or waterproof clothing), or
- Is a taxable clothing allowance paid to employees to purchase their work attire (FBT or PAYE is payable), or
- Simply is not clothing that you or an employee would wear for private purposes.
Essentially, the simplest test we can think of is that it’s deductible if you only wear it because you have to. To quote the IRD, claimable clothing “only includes uniforms or specialist clothing that isn’t reasonably suitable for private use and is necessary and peculiar to a particular occupation.”
You might get away with it once or twice, maybe even 46 times, but the IRD will likely catch up with you eventually. After filing dozens of flawed claims, a personal trainer was given home detention and hundreds of hours of community work for claiming exercise clothing (among other things) as a business expense. Chances are your new shoes for your real estate work are not allowable (unless they are steel capped for visiting industrial property and emblazoned with the company logo).
What Limits What Work Clothes I Can Claim?
The main thing that limits your claims for work clothes as a business expense is this pesky thing call the law. In particular, two sections of the Income Tax Act 2007 (ITA 2007). These two sections work together to highlight and limit all claims that can be made for business expenditure, including work clothes.
Section DA1: The General Permission
Section DA1 sets the groundwork for all business expense claims as it allows for a deduction as long as there is a nexus, or link, to business activity or income generation. This broad allowance is known as the general permission. You can read the full section here, but for your convenience here is the core of it:
DA1 (1) A person is allowed a deduction for an amount of expenditure or loss, including an amount of depreciation loss, to the extent to which the expenditure or loss is—
(a) incurred by them in deriving –
(i) their assessable income; or
(ii) their excluded income; or
(iii) a combination of their assessable income and excluded income; or
(b) incurred by them in the course of carrying on a business for the purpose of deriving –
(i) their assesable income; or
(ii) their excluded income; or
(iii) a combination of their assessable income and secluded income.
For an expense to be deductible, it must first pass the low bar of the general permission test by having a link to your income generation. However, just because something passes this first hurdle doesn’t make it instantly deductible. Other sections of the ITA 2007 act to limit or override the general permission. In terms of work clothes, this is where section DA2 comes in.
Section DA2: The General Limitations
Where section DA1 creates what many might see as the freedom to claim anything and everything, section DA2 firmly squashes most dream deductions.
Of particular note for work clothes is section DA2(2):
“A person is denied a deduction for an amount of expenditure or loss to the extent to which it is of a private or domestic nature. This rule is called the private limitation.”
Clothing falls squarely under this private limitation. You may argue that you need clothes for work but you also need them for basic modesty. When you aren’t wearing clothes for work, you aren’t going to the supermarket naked. Therefore, your clothes fall into the category of being a standard private expense, any business use is simply incidental rather than peculiar.
If you are still confused or on the fence about an item you’d like to claim, get in touch with the team at MBP. What you can and can not claim is not always black and white and each situation has subtle differences that can make a big difference to the deductibility. Not getting your claims right up front can result in back dated tax assessments, penalties of over 100% of your mistake and use of money interest on the outstanding back tax.
This advice is general in nature and should not be relied on as a recommendation. Every situation is unique and requires tailored advice. Get in touch for a free consultation by emailing [email protected] or call us free on 0800 86 85 86.