Is that Meal Tax Deductible?

Inland Revenue have released an interpretation statement on this one recently.

Next time you grab a coffee or a meal at your local café in between back-to-back client meetings and think about claiming this as an expense because you are self-employed and it’s just part of your work day, think again. New Zealand’s Inland Revenue has confirmed that these expenses are not deductible for self-employed taxpayers in all but very limited circumstances.

In recent years, Inland Revenue has been working at clarifying the boundary between private and work related expenditure – we have seen statements on when tax deductions can or can’t be claimed for telecommunication costs, vehicle expenses for home to work travel, and accommodation costs.

The most recent of these is Interpretation Statement IS 21/06 – Income Tax and GST – Treatment of Meal Expenses. Over 37 pages, the interpretation statement considers and concludes on the deductibility of these expenses if incurred by a self-employed person, and also comments on how a different outcome arises for employee meal costs.

While certain meal costs may have a business-driven purpose, a tax deduction is not allowed where the cost is a private expense for the taxpayer. Food is a private or domestic expense for a self-employed person due to the need to eat to stay alive, therefore meal costs for the individual self-employed taxpayer are primarily considered not deductible.

An exception is made for costs where the private element is incidental to a wider business purpose – for example, when entertaining a client, the self-employed person’s costs are treated as initially deductible along with the cost of the client’s meal, but both elements are subject to 50% non-deductibility under the entertainment rules.

The same principles apply to individual shareholders of look-through companies or partners in partnerships. Because of the flow-through nature of these entities, the shareholders or partners are deemed to incur the costs themselves for tax purposes.

Contrast this outcome with an employer paying for an employee’s meal cost for entertaining a client or while on business travel. These costs are deductible for the employer because they are not private when viewed from the employer’s perspective; they are just a tax deductible staff cost.

This distinction, and the interaction with the entertainment rules where these apply, can lead to some interesting outcomes and possibly more questions than answers. To illustrate these differences, we have shown some examples below:

Scenario: Self-employed individual incurs costs for own meals

Are the costs tax deductible?: No

Scenario: Self-employed individual incurs costs for meals for self and an employee

Tax deductible?: Likely outcome is that only the costs relating to the employee are deductible; entertainment or FBT rules may also apply. However, if the purpose for the cost is primarily business (such as a team celebration), the private element may be considered incidental.

Scenario: Self-employed individual incurs costs for meals for self and a client

Tax deductible?: Private element may be incidental and all costs deductible but subject to the entertainment rules.

Scenario: Self-employed individual pays for meals of employee while employee is working out of town

Tax deductible?: Yes

Scenario: Self-employed individual pays for meals for self while working out of town

Tax deductible?: No, except in very limited circumstances such as where there are no practical or realistic alternatives for meals (e.g., where a supermarket is not nearby and it is unrealistic for the individual to prepare their own meals). The costs on top of what the individual would typically spend may be deductible.

Scenario: Company incurs costs for meals for employees (including shareholder employees) and/or clients

Tax deductible?: Yes, entertainment or FBT rules may also apply.

The statement notes that the GST treatment will generally follow the income tax treatment. If the costs are considered personal and not tax deductible, no GST can be claimed.

The moral of the story here is that it is crucial for affected taxpayers to keep accurate records of the purpose of any food and drink related costs so that they can be correctly classified for tax purposes. 

Content provided by Deloitte New Zealand

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