In the beginning of 2021, the IRD notified tax agents that they have a “new campaign for the real estate sector”. They believe real estate agents are claiming a high level of expenses when compared to income. In particular, claiming private expenses but not having appropriate documentation to support the deduction.
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.
What do you need to do?
For expenses greater than $50, businesses are legally required to keep invoices for at least seven years.
We suggest uploading your documents to your online accounting system, or cloud storage (Dropbox, Google Drive, Microsoft OneDrive). If you’re willing to pay for storage and perhaps extra security, take a look at IDrive and pCloud.
Using your laptop or PC is also an option, but it needs to be backed up regularly.
No matter your storage choice, make sure you can easily integrate it into your other apps and devices.
What can’t you claim?
Motor vehicle expenses
You may have a vehicle used mainly for business, but this doesn’t mean you can claim 100% of vehicle costs – fuel, WOFs, servicing, tyres, insurance, etc. Unless you have a second (or third) personal vehicle, it would be almost impossible not to use the business vehicle privately.
Personal travel includes (but is definitely not limited to) trips to and from work, popping into the supermarket on your way home, going to your child’s sporting events, and visiting family/friends.
You should keep a record of business and private kilometres travelled to calculate the percentage used for business. Recording personal and business kilometres for at least 90 days isn’t the most exciting activity, but there are benefits:
- You have supporting documentation should proof be requested by Inland Revenue, and
- Information recorded in a logbook for at least 90 days can be used for up to three years, provided the portion of business use doesn’t change by more than 20%, and
- An accurate split between personal and business kilometres could save you tax
You can find an example of a logbook on the IRD’s website…but as with most things these days, you can use an app! There are many out there – some free and some not – which useyour phone’s GPS to record mileage. Take a look at Driversnote, this review of other great apps designed for small businesses.
If you’re taking the physical route, keep the logbook in your vehicle, place it on your dashboard or on the driver’s seat as a reminder.
We understand that you need to look professional – wearing a suit, dress, jacket, blouse, all contribute to this. However, unless it is clearly a work uniform with prominent logos and branding, or protective clothing, it cannot be claimed as a business expense. Yes, you might wear your suit on the job, but there’s nothing stopping you from wearing it during your free time.
The same applies with jewellery, makeup, haircuts and gym memberships as these are all personal expenses – no exception.
If you could wear a piece of clothing to a wedding, a formal (non-work-related) dinner, a graduation, or a job interview, without being identified as a real estate agent, you cannot claim it.
Entertainment / advertising / marketing
Marketing yourself and your brand will undoubtedly lead to increased business, a larger (potential) client base, and higher income. There can be a fine line though, between personal and business expenses.
- Providing a gift of food or drink to clients – only 50% of the cost can be claimed
- Lunches with clients are 50% deductible
- You can claim 50% of home internet and landline costs
- Dinner out with family and friends is not deductible
- Your daily breakfast, lunch, and dinner are not business expenses unless you’re working out of town
- Sponsorship, where your business is promoted or acknowledged, can be deducted in full
An entertainment expense can only be claimed if the money is spent to help your business earn money.
Education and seminars
Inland Revenue plans to provide education and offer seminars to assist real estate firms, so keep an eye out for these invitations.
We’ve compiled a list of claimable business expenses here. It’s not exhaustive and claimability can often depend on the nature of your business.
- 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, get in touch with Beany at [email protected], or give us a call on 0800 755 333.