We have been asked about tax deductibility of suits and shoes worn for business by real estate agents.
This article identifies the relevant pieces of legislation, summarises it and then applies to a particular case (a realtor in this case) at the end.
New Zealand, does not have the most liberal tax laws when it comes to making claims for work clothes. Australia is more generous with this side of the legislation.
NZ Tax Law and the IRD have a very narrow definition of " work clothing" that would be deductible for tax purposes.
The main thing that limits your claims for work clothes as a business expense are sections DA1 and DA2. In particular, these two sections of the Income Tax Act 2007 (ITA 2007) work together to highlight and limit all claims that can be made for business expenditure, including work clothes.
Section DA1: The General PermissionSection DA1 sets the groundwork for all business expense claims as it allows for a deduction as long as there is a nexus, or link, to business activity or income generation. This broad allowance is known as the general permission.
You can read the full section here, but for your convenience here is the core of it:
DA1 (1) A person is allowed a deduction for an amount of expenditure or loss, including an amount of depreciation loss, to the extent to which the expenditure or loss is --
1. incurred by them in deriving –
2. incurred by them in the course of carrying on a business for the purpose of deriving –
For an expense to be deductible, it must first pass the low bar of the general permission test by having a link to your income generation. However, just because something passes this first hurdle doesn’t make it instantly deductible. Other sections of the ITA 2007 act to limit or override the general permission. In terms of work clothes, this is where section DA2 comes in.
Section DA2: The General LimitationsWhere section DA1 creates what many might see as the freedom to claim anything and everything, section DA2 firmly squashes that idea!
Of particular note for work clothes is section DA2(2):
“A person is denied a deduction for an amount of expenditure or loss to the extent to which it is of a private or domestic nature". This rule is called the private limitation.
Clothing (yes, ALL clothing, except for protective or business branded) falls squarely under this private limitation. You may argue that you need clothes for work but you also need them for basic modesty. When you aren’t wearing clothes for work, you aren’t going to the supermarket naked. Therefore, ALL your clothes fall into the category of being a standard private expense, any business use is simply incidental rather than peculiar.
What Work Clothes are covered? If you want to claim for clothes that you (or your employees) wear to work the clothes must:
To quote the IRD, claimable clothing “only includes uniforms or specialist clothing that isn’t reasonably suitable for private use and is necessary and peculiar to a particular occupation.” The fact that you ACTUALLY DON’T HAVE TO USE IT FOR PRIVATE USE IS NOT RELEVANT AT ALL. If its SUITABLE for private use then it is NOT DEDUCTIBLE.
You might get away with it once or twice, (there is a case of a personal trainer who claimed 46 times! ), but the IRD will likely catch up with you eventually. After filing dozens of flawed claims, this personal trainer was criminally convicted and given home detention and hundreds of hours of community work for claiming exercise clothing (among other things) as a business expense. Chances are your new shoes for your real estate work or new suit or shirt are ALSO are not allowable (unless they are steel capped for visiting industrial property and emblazoned with the company logo).
We've also checked our records - a few years ago a realtor client was audited. IRD declined his claim for suits & shoes as a "Work Clothing" and levied penalties and interest for the last 7 years resulting in a total tax bill of nearly $28k. He was taken to court. No criminal charges were laid in this particular instant but lately, IRD is laying criminal charges to make them as an example for others!
How this law applies to you as a realtor (or a lawyer or an accountant or a doctor!) What you can and cannot claim is not always black and white and each situation has subtle differences that can make a big difference to the deductibility. Not getting your claims right up front can result in back dated tax assessments, penalties of over 100% of your mistake and use of money interest on the outstanding back tax.
We believe, in your case, the definition of "work clothing" may be satisfied if your work clothing is
There could be small chance of IRD accepting your claim as work clothing. However, taking our real-estate agents IRD audit report as a precedent, we feel that the risk of your claim being denied is very high. Sooner or later, IRD will be able to identify this in your returns when comparing it to other real-estate agents returns.
We certainly wouldn't recommend what other Realtors (& their tax agents) are doing in their tax return as OK for you to do as well!
DisclaimerThe above publication discusses income tax & other issues generally and is not intended to be specific tax or other advice. Whilst every effort has been made to provide valuable, useful information, Core Business Services Ltd, any related suppliers, associated companies & practices accept no responsibility or any form of liability from reliance upon or the use of its contents. Any suggestions should be considered carefully within your own particular circumstances, as they are intended as general information only. Please do consult with your tax advisor or call this firm for information / advise specific to your circumstances before finalising any particular course of action