Proceeds of crime, money owed to an ex: What people have tried - and failed - to claim in tax returns

Taxpayers who are earning non-PAYE income have lots of things they can potentially claim to reduce their tax bills, whether it's home office expenses for self-employed people or home loan interest costs for property investors.

But every so often, people try to claim expenses that don't qualify.

Here are some that Inland Revenue has battled over in recent years.

Study before opening a business, and travel to work

In one recent case, the Taxation and Charities Review Office looked at a case in which a business owner sought deductions for education expenses, vehicle expenses and home office expenses.

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The taxpayer was operating an art gallery and art supply business and claimed deductions against their income for study expenses between 2017 and 2022.

But the business did not start until November 2020 and the study after that time was related to automotive engineering, so was also not deductible.

The taxpayer also wanted to claim the travel between their home and work as a business expense. This was rejected. Travel from home to work cannot be claimed and Inland Revenue said there was no evidence of which trips were for the purpose of transporting stock.

Forfeiture of criminal proceeds doesn't count towards a tax bill

A man who argued that forfeiture of his assets under the Criminal Proceeds Recovery Act could be treated as payment in lieu of tax was also denied.

The man sold a false university qualification to an undercover journalist for $12,000 in 2018, of which he retained $3000. He was convicted of obtaining by deception in April 2015.

In September and October that year, the police obtained orders in respect of assets he and his wife owned, on the basis that he had benefited from significant criminal activity, in the sum of about $1.8 million.

Police said the funds were the proceeds of fraud offending and there was a related allegation of tax evasion.

The couple forfeited $575,000 of their assets. In 2019, the man's business was given a statutory demand for tax owing. He argued it had already been paid because of the forfeited assets. This argument was not accepted by the courts.

GST on private school fees

In a case in 2018, a private school operator argued that it should not have to pay GST on payments that parents made to the school because they were charitable donations and unconditional gifts. But Inland Revenue ruled that the payments were for the provision of education services and liable for GST.

Fixing leak issues

There can sometimes be confusion when it comes to repairs and maintenance on investment and commercial properties.

Repairs are tax deductible if they are only restoring a property to its previous conditions. Capital expenditure, which improves the property and makes it more valuable, is not deductible.

In one case, leaks were identified in a Tauranga rental property. A building company suggested the best way to fix them was to change the roof design and replace internal guttering with external.

The owners decided to go with an option that included a roof extension and a full reclad. They included the costs of the work in their 2018 and 2019 income tax returns on the basis it was repairs and maintenance.

Inland Revenue said the costs incurred for the remediation work were non-deductible as capital expenditure.

It went to the High Court, which backed Inland Revenue.

Interest paid in relationship property agreement

In 2016, a man tried to deduct interest expenses of $18,069.31 from his income tax return because it was money he was required to pay his ex-wife under a relationship property agreement.

Before, during, and after their marriage, the man had interests in several successful companies. In April 2006, he and his partner entered into a relationship property agreement and a parenting plan agreement.

He was to keep his business interests and half of the proceeds from the sale of the family home. She was to receive $1.3 million from the sale of the family home towards her half share of the total settlement figure.

In 2015, she received a High Court judgement that her former husband owed her $210,355 and penalty interest of $12,988.70.

He paid her interest of $249,249.23 and a capital payment in November 2015.

He sought to adjust his tax position to take account of the interest paid, on the basis he had effectively borrowed the funds and was required to pay the interest so as to avoid having to sell his income producing assets to pay her or borrow money from a third party to retain his income earning assets.

The Taxation and Charities Review Authority found his relationship property obligations arising from their settlement were without doubt distinct from his income earning activities. His income did not alter whether or not he paid her, he derived no income from her and there was no business or income earning element in making the payments to her. The reason for making the interest payments was deferral and default on his relationship property obligation.

Real estate agents' clothes and grooming

During the post-Covid housing boom, Inland Revenue turned its attention to real estate agents' tax returns.

It had concerns many were making large claims for expenses relative to their level of income, and warned that people should not be claiming for grooming or clothing.