​Tutorial 4

th​
Week beginning 5​ May 2014
(Deductions, Repairs & Maintenance, Timing)

QUESTION 1

Dave is a mechanic who started up his own business in September 2013 fixing Morris Minors.
He runs the business from a small garage in St Lukes, Auckland, held under a 5 year lease.

Dave hears that Rob, another mechanic, is going to live in Australia for 2 years. Dave initially
offers to buy Rob’s business but Rob will not sell. Instead Dave agrees to a contract whereby he
pays $10,000 to ​take over Rob’s business​ for the 2 year period. At the end of that period the
business reverts to Rob.

To cope with the increased work from both his and Rob’s business, Dave needs larger
premises. He moves to a bigger garage in Westmere and therefore no longer needs the small
garage in St Lukes, which still has 4 years to run on its lease. Dave negotiates with the current
landlord to pay ​$15,000 up-front​ (being approximately 3 years rent) to be let out of that lease
immediately.

Dave does all his book-keeping in a room of ​20m​2​ set aside​ in his home of 150m​2​. Dave has a
mortgage on his home and pays ​$6,000 in principle and $4,000 in interest​ during the 2013
income year. He also ​pays $1,500 in rates and $800 in telephone expenses.​ By doing all his
accounts personally Dave ​saves​ himself the cost of an accountant, which he estimates to be
$2,000.

Dave also keeps much of his surplus stock in an old shed at the back of his house. The shed is
10m​2​. One weekend in March when he is away surfing, the shed is ​broken into and $2,000​ of
stock is stolen. It was insured but the insurance payment is not received until April 2014.

Dave decides he needs to upgrade his storage but finds that new lock-up garages are too
expensive, ​costing almost $3,000​. Instead, in late March 2014 he buys a second-hand garage
off a friend for ​$1,500​. Dave has to fix the door and paint the entire garage before it can be used
but it is otherwise OK and is much cheaper than buying a new one.

Using the appropriate sections and cases advise Dave on what deductions he may be
entitled to.

BD2 An amount is a deduction of a person if they are allowed a deduction for the amount under
Part D
 Nexus between type of deduction and income earning process. Must be directly incurred with
production of gross income.
Other deductions not expressly authorised in the Act is prohibited

DA 1 General permission: a) incurred by them in deriving their assessable income, excluded

income or a combination of both, or b) incurred by them in the course of carrying on a business
for the purpose of deriving their assessable income, excluded income or a combination of both.

Europa Oil ltd v CIR- expenditure must be incurred in the course of deriving income, not
before/after.

Limits:
1.​ ​Relate to income earned, not just theoretical.
2.​ ​Only the business element of a fee incurred can be deducted.
3.​ ​If expense entirely non-market or arose under scheme to reduce tax, can be labelled as ‘tax
avoidance’

Costs must be incurred: therefore the accountancy fees are non-deductible. $3000 garage price
non-deductible either.
Other costs involved:
Take over $10000: depending on how we see that, whether that is part of running Dave’s
business or not (through expansion), if it’s not seen as an expansion then it’s beginning a new
business, which is not in the course of running a business, therefore not deductible
Lease $15000: yes incurred in the course of carrying on business for the purpose of deriving
assessable income, actually incurred
Home bookkeeping 20/150m2 Principle 6000*20/150= 800, interest 4000*20/150= $533.33
Rates $1500 1500*20/150=200
Telephone $800 if according to area 800*20/150=107
Third party theft $2000 theft is deductible but if its covered by insurance, is it still deductible? If
financial year is 31​st​ March then at that stage it should be deductible? 2000
Garage $1500

Total deductible: 15000+800+533 +200+107+2000+1500=20140

QUESTION 2

Hine is a medical doctor who works in the ER Department of Auckland Hospital. Her annual
salary is $50,000. The expenses Hine incurs to carry out her job are uniform ​cleaning costs of
$150​ and car ​parking costs of $1000.

From 1 July 2013 Hine also operated a private business in homeopathic medicine from her
home in Northcote. She has set aside ​40m​2​ of her 180​m2​​ house as a waiting and consulting
room for patients. She hires a ​cleaner​ to maintain these rooms for ​$55 per week​. She also
pays $8,000 on her interest-only mortgage​ and ​$1,100 on her mobile phone and internet
expenses. Her ​boyfriend pays the rates, power and insurance on their house.

Hine’s business has proven very successful and last year she purchased an ​advanced
computer system for $10,000​. This was purchased with funds borrowed from the bank at a ​rate
of 10% interest​.

To keep up to date with the latest developments in Homeopathy Hine subscribes to

“Homeopathy Tomorrow” ​magazine for $500 per year​. She also ​pays $9 per week​ to subscribe
to a number of alternative magazines which she reads ​for her own interest​ but which she then
puts in her ​waiting room​ for patients to read.

Hine and her partner also attended a conference​ on homeopathy in Christchurch in December
2013. Hine paid for the whole trip and they ​both flew first class and stayed at the Christchurch
Plaza hotel​. While in Christchurch they attended a number of social events, including the
annual ​Homeopathic Ball, which cost $100 per ticket​.

Hine also visited the Christchurch Casino. It cost her ​$50 in taxi fares and $100 in entrance
fees​ to the Casino but Hine considers this money well spent because she won more than
$2,500 on black jack.

Upon her return to Auckland in December 2013 Hine faced a number of difficulties. She
received a ​speed-camera fine of $180​ incurred while paying a ​house-call​ to a patient. She also
had trouble obtaining her supplies of Homeopathic medicine, some of which are very scarce. In
order to overcome this problem, Hine negotiated a contract with distributors “Homeo-Direct”
whereby she pays them ​$2,000 per year for 4 years​ in return for gaining priority access to rare
homeopathic supplies.

Advise Hine what deductions she may be entitled to, with reference to relevant cases and
sections where appropriate.

Cleaning yes. Parking yes (motor vehicle expenses). Cleaning of appointment rooms $55/week
= $2860 yes, mortgage interest $8000*40/180=1778 yes, mobile and internet don’t know how
much of it is business but say $1100 all deductible, power rates insurance not deductible,
computer system $10000 no capital, interest 10% of 10000=1000 no capital , Homeopathy
magazine $500 yes, $9/week mostly personal entertainment, Trip to Christchurch entertainment
for Hine only deductible (50%) so ¼ of total cost, Homeopathic ball possibly yes 50% of Hine’s
therefore $50 deductible, casino no, fine no, $2000/yr contract yes