NZ Inland Revenue Department - Treatment of Contract Pilots

[Artisan]

I am a Contract Pilot and a New Zealand resident.

Recently, I departed from regular employment and set up as a sole trader - Contract Pilot. I self funded an aircraft type rating, to add to my tool kit.

I believe that the cost of the type rating is a legitimate business expense.

I am interested to hear from anyone who has been down this road before me. In particular, I ask the following questions;

1. Has anyone successfully offset the cost of the type rating against taxable income? If so, what mechanism was used;
(a) Expensed the cash amount?
(b) Claimed the interest on a loan?
(c) Capitalised the rating an depreciated it?
(d) Other?

2. Has anyone been unsuccessful in their endeavours and had the IRD dissallow their claim?

Please note that I have employed both an Accountant and a Tax Barrister for professional advice.

I consider the advice and experience of my professional peers, to be equally important.

I hope that the information gained through this thread will be of use to all pilots contemplating contract work.

[remoak]

Perhaps you could share with us what your accountant and tax barrister are telling you?

I have been considering doing the same thing, as far as I can tell, training is tax-deductable, but you never really know until you commence battle with Inland Revenue...

[Artisan]

Good to hear from you remoak.

The NZ tax system is not prescriptive. Most of NZ's tax rules are not spelt out in legislation. The law seldom spells out what is income or what is a legitimate tax deduction. Rather, it provides concepts and these concepts provide a framework around which the tax system has developed. The IRD will interpret on a case by case basis according to the spirit of what the law was intended to achieve. For this reason, you won't get a definitive answer from a lawyer or accountant. The only time you will get a definitive answer, is if a similar case has previously been tested (case law) or if the IRD has previously issued a Ruling on the matter.

Hence; my interest in contract pilots who have already been through this.

The IRD's position is as follows;

1. The applicable reference as to whether an aircraft type rating is deductible is section BD 2(1)(b) of the Income Tax Act 1994. The test for determining whether an item of expenditure is deductible, is whether their is sufficient nexus (connection) between that expenditure and the income producing activity of the taxpayer. Whether a nexus exists will be a matter of fact and degree in each case. If the expenses are merely preparatory or preliminary to the income earning process or business, they will lack the required nexus. From case law it is possible to make a general statement that an income earning process or business has commenced when the taxpayer has a business or structure in place and has commenced their dealings or operation from which they expect to derive income.

2. Even if the expenditure was found to be deductible under
ITA,BD2(1)(b), it still has to be considered in terms of ITA BD2(2)(e), in relation to the Capital/Revenue distinction. There are seven tests in relation to the capital revenue distinction:
(i) The need or occasion which calls for the expenditure,
(ii) Whether the expenditure is recurrent in nature,
(iii) Whether the source of the payment is from fixed or circulating capital, (iv) Whether the expenditure relates to an identifiable asset,
(v) Whether the expenditure is a once and for all payment producing assets or advantages which are of an enduring benefit,
(vi) Whether the expenditure is on the profit making structure or the profit making process,
(vii) What the treatment of the expenditure is according to the ordinary principles of commercial accounting.

3. If the expenditure relates to the income earning structure of a business and brings into existence an enduring benefit, it is therefore Capital Expenditure and is not deductible.

I hope that the inclusion of; the several thousands of dollars worth of advice (above), will entice others to contribute freely for the benefit of all professional pilots.

[remoak]

Interesting! Good on you for sharing that.

In my case, I have formed a company which is in the business of providing skilled personnel to the airlines. I train my staff, so I would therefore claim my training costs as tax deductable. Now, I can't answer the questions in part 2, but part 1 should be easy enough to establish, and as for part 3, I would argue that the expenditure does not bring into being an enduring benefit, as the type rating is valueless without a recurrent check.

It also seems to me that it depends where you are paid, and whether or not you are ordinarily resident in NZ. In my case, the last time I undertook contract work, I was paid from a US bank into my Channel Islands bank, and I was not resident in NZ for the required number of days per year. If you treat the training as part of the fulfillment of your contractual obligation, you can probably offset it.

I haven't tried it yet, but may be doing so shortly... I'll let you know.