Snippets
Making the most of the changes
The Government’s relief package for small to medium sized businesses includes a new provision which provides beneficial treatment for legal expenses. Under the general deductibility provisions of the Income Tax Act, if an expense is of a capital nature it is non-deductible.
The process of analysing expenses to determine if they are of a capital nature can be complicated and time consuming. Legal fees are often reviewed for this purpose as legal services are often required for transactions that are of a capital nature, such as the acquisition of a building.
The new legislation provides that in deriving income or running a business, where a taxpayer incurs legal fees of $10,000 or less in a tax year, the legal fees will be deductible irrespective of whether they are capital in nature. However, it is important to note that if more than $10,000 of legal fees are incurred the whole amount will be subject to the capital limitation and require analysis to confirm deductibility.
The definition of legal services is tied to the definition under the Lawyers and Conveyancers Act 2006, which is very wide and is likely to cover most types of services. A further requirement is that the services be provided by a person holding a practising certificate issued by the NZ Law Society or an Australian equivalent.
A practical method of applying the provision is to monitor legal expenditure and where possible request that your lawyer defers further services until the following tax year. Use-of-money interest (UOMI) From 1 March 2009, the UOMI rate for underpayments of tax to IRD fell from 14.24% to 9.73% and the rate for overpayments of tax fell from 6.66% to 4.23%.
Author - C 2009 University of Waikato