December 06, 2023
Understanding Overseas Travel Expense Deductions in NZ
Planning an overseas trip? Business, personal, or a mix of both? It may be worth reaching out to your tax advisor first about what you can claim.
When a business owner or its employees travel for work, they’ll incur a range of costs, including airfares and other transportation costs, accommodation, meals, and incidental expenses. When working out which costs are deductible to the business and which are not, you’ll need to keep good records about what the costs relate to.
Inland Revenue released a Questions We’ve Been Asked – Deductibility of overseas travel expenses, which sets out some guidelines on what is deductible and what isn’t. The deductibility of the cost of meals is specifically covered by Inland Revenue IS 21/06, which differs from the application of the guidance on overseas travel expenditure. IS 21/06 covers when meals paid by an employer are deductible to the employer and if they are taxable to the employee. They also give guidance on meals that fall under entertainment expenditure rules. There is also different treatment if meals are incurred by a company or someone self-employed.
Income tax deductions can be claimed for overseas travel costs to the extent that they have a connection with deriving assessable income or carrying on a business. A business can’t deduct any part of the travel costs that are of a private or domestic nature, of a capital nature, or incurred in deriving exempt income or income from employment. If the costs relate to both a business and a private expense, you may need to apportion the costs between deductible and non-deductible amounts on a reasonable basis.
As a company isn’t a person, the private/domestic limitation doesn’t apply, but a company will need to be careful if it covers an employee’s private costs (for example, adding a holiday to the end of the trip or covering the costs of an employee’s partner or family). If an employer does pay costs unrelated to the business, the employer would need to consider if the payment is subject to PAYE or fringe benefit tax.
Work-related trip and incidental holiday
You go overseas to buy stock for your business, and while there, you take the opportunity to spend a day with an old friend. You spend three days overseas, two on business and one on holiday. As the purpose of the trip was business, a reasonable apportionment would be to allow a deduction for the total cost of the airfare and two days of accommodation for business.
Variation: You are away for 14 days, so take a spare half day to sightsee. In this case, the holiday aspect of the trip is incidental, and 100% of the travel costs would likely be deductible.
Business trip and holiday
You go overseas for a family reunion and to negotiate business contracts. You are overseas for a total of 35 days and spend 12 on business. Both trips were necessary, and you had arranged a meeting with business contacts prior to your departure. A reasonable apportionment is to allow a deduction for 12/35 of the cost of the airfares and the costs associated with accommodation, etc., for the 12 days while on business.
Private trip with incidental work
What about if you are away on holiday for 14 days and take a half day trip to drop in to say hello to a few business contacts and check your emails? In this case, it is unlikely that any of the costs would be deductible as you wouldn’t have travelled overseas to say hello to business contacts; the holiday was the trip’s main purpose.
ABC Ltd has decided to send an employee to Melbourne for a conference. The employee asks to extend the trip to catch up with friends, and the employer agrees to push out the return flight and approve some annual leave. The company pays for the return flights, and travel costs other than the extra days that the employee is on leave, which the employee covers. The purpose of the trip was business-related. The company can claim a deduction for the full cost of the return flights and the accommodation costs incurred.
Variation: Same facts as above, except ABC Ltd agrees to pay for the cost of the employee’s additional nights’ accommodation as a reward for their recent good performance. ABC Ltd needs to treat the extra nights’ accommodation cost as income subject to PAYE in this variation.
If you take your partner or another travel companion with you, their costs will only be deductible if they are making a substantial contribution to the business purpose of the trip. Inland Revenue has released guidance on this in Questions We’ve Been Asked – Deductibility of a companion’s travel expenses. If your spouse accompanies you on a business trip and attends only social functions, the cost of the spouse’s share of the trip is unlikely to be deductible. Alternatively, suppose your spouse accompanies you on a business trip and while there, performs such functions as running a registration process, organising events, or maybe interpreting in a language you do not speak. In that case, the cost of the spouse’s share of the trip is more likely to be deductible.
There is plenty to think about, so keeping good records and discussing with your tax advisor is always a good idea.
Other considerations with overseas travel
Travelling to another country and running your New Zealand business while you are there can easily create a taxable presence in that country for your business. The rules are different in every jurisdiction, so don’t assume that the rules for one country apply anywhere else. If you’re planning more than short visits to any country, check in with your tax advisor to make sure you’re not creating a tax liability overseas.
When it comes to travelling internationally and claiming business expenses, your overseas expenses will not include GST apart from travel insurance, which is usually purchased within New Zealand before you leave the country.
If you have any questions about travel expense deductions, chat with our team today!