Tax department rules on deducting accountancy fees

A Taxation Review Authority ruling says that tax deductions for accountancy fees incurred after the balance date of that income year cannot be claimed – even though there is a space for it on the income tax return form.

Withers Tsang partner Mark Withers says the safe course for property investors to take arising from the ruling has to be to claim the deduction in the year it is incurred.

He expects income tax returns will have to be modified to cope with this judgment – and the effect for the 2008 year will mean a bigger tax take for the IRD.

IRD lawyer Graham Tubb agrees deduction should be claimed in the year it is incurred and says the department is currently looking at the implications of the decision.

“We are aware that in the past some taxpayers have included a cost for these fees, even though the work may not have been fully performed or charged as at balance date.

“This means the expenditure may not have been incurred during that income year and should be claimed in the next year’s return. While, in the past, we may not have corrected these claims, due mainly to the relatively small amounts of money involved, we reserve the right to do so in appropriate cases.”

The judge ruled that although taxpayers have a statutory obligation to prepare financial statements and tax returns, they have no legal obligation prior to balance date to pay the accountancy firm.

If it was an arrangement entered into after balance date, then the expense was incurred after balance date and was not deductible until the year following the balance date.

In this case the accountancy fees were recorded in a journal entry dated as at the balance date and shown as an estimate of fees for the year concerned. The letter of engagement included a statement that the engagement for accountancy services was to be on a continuous basis.

The judge said that for consistency with legal principles relating to the meaning of the word ‘incurred’, that to deduct fees in an earlier year for work done some months later was a wrong practice.