Question 1

Brian is a self‐employed builder who specialises in renovating residential properties. During the week, he travels from home to various building sites where he works. Sometimes, he works at more than one site during a particular day. He usually carries his tools and some building products in the back of his truck. On weekends, he often goes to the homes of potential clients to quote for jobs. Only a small percentage of his quotes are accepted by clients, as he charges quite a high fee for his services. Advise Brian as to whether his travel expenses are deductible.

The travel expenses incurred by Brian for travel from his home to the various sites should be deductible on the basis that Brian’s home is his base of operations and that he is required to    use his truck for the essential transport of equipment needed to complete his contracts. This is supported by Case F46 (1983) 6 NZTC 59,972, in which the taxpayer sought to claim a         deduction for travel costs from his home to the hotel where he performed as a self‐employed  musician. The taxpayer argued that his home was his usual base of work, and therefore travel from his home to the hotel was travel from one work location to another. Moreover, the          motor vehicle method of transportation chosen was necessary due to the amount of                 equipment that was required to be moved between the two locations for each performance. It was found that that there was a clear nexus between the travel expenses and the taxpayer’s     income‐ earning process. In addition, the method of transport was determined by the need to  move the equipment.

Similarly, travel expenses incurred in relation to travel between the sites during the day and   to give quotes during weekends should also be deductible on the basis that the travel is           between two places of work and therefore business related (Taylor v Provan [1975] AC 194). The fact that only a small percentage of quotes are accepted by Brian’s clients does not          prevent a deduction being claimed; the general permission is still met because Brian incurred the travel expenditure in the course of carrying on a business

Question 2

Review question 1 page 374 of textbook

The question here is whether David and Brenda can get a deduction for income tax         purposes for interest paid under s DA 1(1). The reference in s DA 1(1)“to the extent”    contemplates apportionment. Section DB 5(1) allows a deduction for expenditure           incurred in borrowing money that is used as capital in deriving income and s DB 6(1)    allows a deduction for interest incurred. Note that ss DB 5 and DB 6 override the capital limitation in s DA 2(1).

There are a number of established authorities in this area, including Borlase v CIR (2001) 20 NZTC 17,261 (HC).

The interest payable on the borrowings used to buy the private asset (ie, the house in      Bombay Hills that David and Brenda live in) is not deductible. It was not incurred either in deriving assessable income or in the course of carrying on a business for the purpose of deriving assessable income. Therefore, neither s DA 1(1)(a) or (b) are met.                   Furthermore, the money borrowed to purchase the Bombay Hills house was used for a     private and domestic purpose — so the limitation of s DA 2(1) would apply.                     Any interest or expenses payable on the borrowings used to refinance the Auckland         house, which David and Brenda rent out, is deductible — as the $100,000 is used in         deriving gross income (from rent). Therefore, s DA 1(1)(a) and (b) are met. Section DB 6 overrides the capital limitation and the interest on the $100,000 is deductible.

Question 3

Review question 2 pages 374-5 of the textbook

ABC Corporation Ltd

It would probably be difficult to identify a strong nexus between the expenditure and the  income earning process unless some link can be made between the need to have suitable  premises (including appropriate interior decoration such as potted plants) in their income earning process. Therefore a deduction under s DA 1(1)(a) could be difficult to sustain.    A deduction is much easier to justify under s DA 1(1)(b). Clearly if a taxpayer is carrying on a business as a stockbroker and merchant banker, it is necessary to have premises of a high standard in a modern building. The use of potted plants as part of the interior            decoration is entirely consistent with premises necessary for those in the financial            services industry to carry on business. Therefore a deduction could easily be sustained     under s DA 1(1)(b).

Rex Publishing Ltd

It would be difficult to identify a nexus of the payment of the sum paid to Miss Young and the derivation of income from the sales of newspapers and advertising space in those         newspapers. Such expenditure would probably fail to qualify for a deduction under s

DA 1(1)(a). There expenditure would also be incurred several years after the story      appeared and hence the income “earned” from the publication of the defamatory story would have already been returned in an earlier income year.

Under s DA 1(1)(b) a deduction would be justified as being necessary to the carrying on of a newspaper publishing business. Law suits are a risk of publishing and can be seen as a     trade off for the timely publication of stories (perhaps without sufficient checking or           verification) and the publication of sensational stories to attract readership. In Herald and  Weekly Times Ltd v FCT (1932) 48 CLR 113 it was held that libel costs were a normal       occupational hazard in the publication of newspapers and were deductible.

Tim is a Young Entrepreneur

There is an insufficient nexus between the expenditure incurred on travel and the new fast-food venture (if any) to justify a deduction under s DA 1(1)(a).

Similarly there are problems in obtaining a deduction under s DA 1(1)(b). This is because there is no business in existence when the expenditure was incurred. Even if Tim had        proceeded with his idea to open a sushi bar, the travel costs would be preparatory to the    commencement of that business and would have the characteristics of capital                     expenditure which is a prohibited deduction under s DA 2(1). As it is Tim did not proceed with his idea to open a sushi bar the business has never actually commenced and a            deduction would not be authorised under s DA 1(1)(b).

It may be possible to argue some vague link with the travel expenditure and the fast-food business he opens in partnership with a friend. That link is very tenuous because there is no evidence that information and/or knowledge obtained on the trip to Hawaii and Japan has been utilised in the new fast food venture with his friend. Even if that link was          established the expenditure would still be regarded as relating to a preparatory                investigation and hence not deductible as it would be capital expenditure incurred with   the opening of a new business.