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Introduction to Business
Inland Revenue's logo appears, together with the series name "An Introduction to Business" below. Next, the title of the video "03 Expenses" appears.
"An introduction to business. Expenses. In this video, we explain the difference between revenue and capital expenses and what you can claim in your income tax return."
"You need to understand how expenses work, because they're an important part of your tax calculation."
A circle labelled "Gross Sales" appears. The circle becomes a pie chart divided into "Expenses" and "Net Profit", illustrating that your net profit is what's left of your gross sales after expenses are deducted.
"When you complete you return, you record your gross sales for the year, and deduct your business expenses. This will give you your net profit. You pay income tax on your taxable income, which will be your net profit plus any additional income."
The circle goes blank and a cashbook appears in the centre. To the side of the circle, an image of paper invoices appears, followed by images of a computer and a floppy disc, indicating that records can be kept electronically, provided you keep a backup copy.
"You must keep a record of your expenses as you go. A cashbook is a good way to keep track of your expenses, and your income."
"Please retain all invoices and receipts. If you're audited, and the paperwork is missing, your claim may be disallowed."
"You can keep records electronically. Make sure you keep a backup copy and you can produce the information easily when necessary."
"Good record keeping will also help you manage your business better, and you'll find it easier to raise finance."
Alice is pictured at her desk, working on her computer. Stationery items on her desk, and a lightbulb dropping down from the ceiling, are highlighted to indicate common revenue expenses. Next, the two computers on the desk are highlighted as examples of capital expenses.
"To explain the difference between revenue expenses and capital expenses, let's have a look at Alice's office."
"Revenue expenses are incurred in the day-to-day running of the business, like stationery, rent, power and your ACC levies."
"Capital expenses are big-ticket items that you keep in your business for longer than a year. Common examples include computers, motor vehicles, and machinery. You can't claim a deduction for a capital expense - instead you claim depreciation."
The camera zooms in on one of the computers. Text "More than $500?" and "Life more than 12 months?" appears on the computer to sum up the test for a capital expense.
"If you're not sure whether an item is a revenue or capital expense, ask yourself these two questions. Is it worth more than $500? And does it have an expected life of more than 12 months? If your answer to both questions is "yes", the item is probably a capital expense."
"Please see our depreciation video for more information about depreciation of capital expenses."
We again see Alice at her desk. A guitar is crossed out to show that private expenses aren't deductible.
"Revenue expenses can be deducted from your gross income, provided the expense relates to your business."
"Private expenses are not deductible."
The camera pans out to show Alice's whole house. Her office is highlighted. Common household expenses flash up on the screen: "Rates", "Insurance", "Power", "Rent", and "Interest". A scale at the bottom of the screen shows that the floor area of Alice's office is 10% of the area of the whole house.
"If the expense is partly business and partly private, you need to make an adjustment to ensure you're only claiming the business percentage."
"Let's look at an example of a private use adjustment."
"Alice has an office based in her home. As she has set aside this office exclusively for business use, she is able to claim a percentage of her household expenses in her tax return."
"Common examples of expenses include: rates, insurance, power, rent, or interest on your mortgage."
"So what percentage can you claim?"
"It's based on floor area. Alice's office is 10% of the total floor area of her home. She can claim 10% of the household expenses she uses for business."
"You can also use square metre rates published by Inland Revenue to work out the amount of the household expenses you can claim."
The garage door rolls up, revealing Alice's car. A logbook pops up, with the message "3 months" - the length of time a logbook must be kept. The car is split into two colours to show Alice can only claim a percentage of her costs. The message "3 years" tells you a new logbook must be completed after this period of time.
"Many people use their car for business, and for private use."
"You can keep a logbook to work out your private use adjustment. Record each trip you make, both business and private."
"After three months, work out the number of kilometres you travelled on business and compare this figure to the total kilometres travelled."
"This is the percentage of your motor vehicle expenses you can claim in your tax return."
"You can use this percentage for three years. After three years is up, you need to keep a logbook again, for another three-month period."
The car leaves the garage and drives down the road, passing street lights and trees.
"There's another way you can work out your deduction for motor vehicle expenses."
"Keep a record of all the kilometres you travel on business, and calculate your claim based on Inland Revenue's kilometre rates or the Automobile Association's mileage rates."
"You may need to make private use adjustments for other expenses too, like telephone expenses and entertainment."
The closing sequence. Inland Revenue's website address is shown, and useful information on the website is listed below: the Tool for business, and a printable cashbook and vehicle logbook. ACC's web address follows, and then Business.govt.nz's, with a mention of the start-up health check available.
The video ends with Inland Revenue's logo and web address, and a footer reading "New Zealand Government".
"To find out more information about expenses please visit our website."
"Our "Tool for business" has everything you need in one convenient place including a cash book template you can download and a printable vehicle log book. "
"To find out about your ACC levies check out ACC's website."
"And go to business.govt.nz to access further tools and resources for starting in business."