What is a business expense?

On the surface, the answer is quite simple: any purchase you make that supports your business’s operation is a business expense.

IRD allows you to claim business expenses (partially or in full) as tax deductions. This means that the amount of income you pay taxes on will be reduced and, by lowering your income, your amount of tax payable will be less.

For example, let’s say you sell bananas at the local market, making $50k a year selling the freshest bananas known to humankind.

However, the title of Top Banana does not come without a price. To run your business, you might spend money on:

• Procuring your produce (cost of goods sold)
• The fee for your market stand (external space hire)
• The petrol you need to get there (motor vehicle expenses)
• Your social media manager (subcontractors)

All these expenses add up to a whopping $20k annually.

When you file your return, you’ll need to declare $50k of self-employed income. But you can also claim $20k in business expenses. Because of this, your tax payable will be calculated on your total taxable income of $30,000 ($50k minus $20k).

You are getting tax relief in two different ways:

1. The less taxable income you have, the less tax to pay. To state the obvious, $30k is less than $50k.
2. Your effective tax rate is dropping. Since tax rates are calculated using progressive tax brackets, the lower your income, the lower the effective rate you’ll be taxed at. 
   • Very simply, $50k will be taxed at an effective rate of 15.3%, whereas $30k will be taxed at an effective rate of 13.9%. 

💡 An effective tax rate is exactly what it says on the tin: the actual percentage of your total income that you pay in taxes. For more information, check out our guide to tax rates for sole traders.

So if you claim business expenses for your banana business, you could expect to pay around $4,158 of income tax. If you weren’t claiming any business expenses, you may end up paying around $7,658. You just saved $3,500 by simply reading this article – and that’s bananas!

Nonetheless, the more you peel away the layers of IRD’s regulations, the more interesting the complexity of expense claims gets:

• Certain purchases can become depreciating assets; non-consumables like cars, computers or machinery, and they all have different depreciation rates (fun!).
• Some expenses can only be claimed in part, if you also have them for private use, like your mobile phone bill.
• Some categories can be blurry – you may or may not be able to claim some expenses, depending on the context.

Essentially, there are dos and don’ts for claiming expenses, and Hnry is here to guide you through it. For every Curious George out there, we’ve put together a comprehensive guide on expense claims – everything you need to know to get it right.

Or, you could just use Hnry. You’d be bananas not to!

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