More than 617,000 enterprises are registered in New Zealand, and nearly three-quarters of them operate without a single paid employee. That means a lot of business owners are handling their own overheads without a finance team or a dedicated accountant on speed dial. Here’s what you actually need to know.
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This article is general information only and does not constitute professional advice. For your specific situation, consult a qualified professional.
Overhead expenses are the day-to-day running costs of your business — the stuff you pay for regardless of whether you made a sale this week. Rent, utilities, insurance, software subscriptions, professional fees. The Inland Revenue lets you claim these against your business income, which reduces your taxable profit. But the rules around what counts, what doesn’t, and how to document it are where most people get tripped up. Getting it right means less tax paid and fewer surprises if the IRD comes knocking. Getting it wrong can mean missed deductions, denied claims, or worse.
What’s at Stake When You Get Overheads Wrong
The IRD routinely audits New Zealand businesses, from GST registration checks through to full examinations of business and personal records. When they look at your expense claims, they’re checking four things: documentation, business purpose, reasonableness, and consistency across years. Claims that don’t stack up get denied. If the IRD decides the error was careless or deliberate, you’re looking at penalties on top of the tax owed.
Common audit triggers include high entertainment claims relative to revenue, vehicle claims without a logbook, home office claims that look disproportionate, and expenses that appear personal — think travel to holiday destinations or luxury items. The business.govt.nz guide on claiming expenses makes it clear: you need a record of the expense or the IRD may not allow the claim at all.
But the flip side is just as costly. Many business owners miss legitimate deductions simply because they don’t know what’s claimable. A well-managed set of expense claims versus a poorly managed one can differ by thousands in tax each year. That’s not small change for a business operating on thin margins.
What Actually Counts as an Overhead Expense
The starting point for understanding overheads is the distinction between expenses that are fully deductible, partially deductible, and not deductible at all. The IRD’s types of business expenses page lays out the categories, but the real-world application is where it gets interesting.
Fully Deductible Expenses
These are the straightforward ones. Wages and salaries you pay to employees — including PAYE, KiwiSaver employer contributions, and ACC levies — are fully deductible. Rent on business premises, rates, building insurance, and utilities all count. Professional fees for accounting, legal work related to the business, and consulting costs are in. Business insurance premiums — public liability, professional indemnity, business interruption — are deductible. Marketing and advertising costs, software subscriptions (Xero, MYOB, Microsoft 365, project management tools), bank fees on business accounts, and interest on business borrowings all qualify. Stationery and office supplies are fully deductible. Training and professional development courses directly related to your current business activities also count.
Partially Deductible Expenses
This is where it gets trickier. Vehicle expenses: if you use the same vehicle for business and personal trips, you can only claim the business portion. The IRD requires a logbook for at least 90 consecutive days to establish your business-use percentage, and that percentage holds for three years. The deductible portion covers fuel, insurance, registration, repairs, and depreciation.
Home office expenses: you can claim a portion of your household costs — power, internet, rates, insurance, mortgage interest if you own, or rent if you’re leasing. The standard method uses floor area: if your workspace is 10 square metres of a 100 square metre house, you claim 10% of eligible expenses. For the 2025–2026 tax year, the IRD square metre rate is $53.10 per square metre of dedicated workspace, plus a portion of actual costs for shared areas.
Phone and internet: if you use a personal phone or home internet for business, you can claim a reasonable portion based on actual usage. The IRD doesn’t require you to itemise every call — a reasonable estimate is acceptable.
Meals and entertainment: this is the one that catches most people. Client lunches, team functions, Christmas parties — these are 50% deductible. Meals you buy while travelling for business are 100% deductible. Meals at your regular workplace are a private expense and not deductible at all. The 50% rule applies to corporate boxes, renting a boat for entertaining, gifts of food or drink, off-site meals with clients, and annual company trips with personal elements.
Expenses That Are Not Deductible
Some things are straightforwardly not claimable. Income tax you pay on profits isn’t deductible. Fines and penalties — IRD penalties, court fines — are out. Private and domestic expenses like groceries, personal clothing, and family holidays don’t count. Capital losses on disposal of assets generally aren’t deductible. And drawings — money you take from the business for personal use — aren’t an expense.
→ Scroll right to see all columns
| Fully Deductible | Partially Deductible | Not Deductible |
|---|---|---|
| Wages and salaries | Vehicle expenses (business portion) | Income tax on profits |
| Rent on business premises | Home office costs (proportional) | Fines and penalties |
| Professional fees | Phone and internet (business use) | Private/domestic expenses |
| Business insurance premiums | Meals and entertainment (50%) | Capital losses |
| Marketing and advertising | Drawings | |
| Software subscriptions | ||
| Bank fees and interest | ||
| Stationery and office supplies | ||
| Training (current business) |
Common Mistakes That Cost You
Based on what accountants and the IRD see most often, a few errors keep coming up. Knowing them won’t just save you money — it’ll keep you off the audit radar.
Claiming Personal Expenses as Business Expenses
This is the most common mistake and the one most likely to trigger an audit. The nexus test is your safeguard: if you wouldn’t have incurred the cost without the business, it’s probably deductible. If you’d have paid it anyway — groceries, personal clothing, family holidays — it’s not. The IRD is particularly alert to expenses that look personal dressed up as business costs.
Insufficient Documentation
You need receipts or invoices for all significant expenses. Bank statements alone may not be enough if the IRD asks for proof. Digital records are fine — most accounting software lets you attach receipts directly to transactions. But if you can’t produce a record when asked, the claim can be denied. The IRD record-keeping checklist covers what you need to hold onto.
Incorrect Allocation for Mixed-Use Expenses
When an expense serves both business and personal purposes — a vehicle, a home office, a phone plan — you need to calculate the business portion accurately. Guessing or claiming 100% when it’s really 60% is a fast way to get on the wrong side of an audit. Use the logbook method for vehicles, the floor area method for home offices, and a reasonable estimate based on actual usage for phones and internet.
Timing Issues
Claim expenses in the correct income year — when you incurred them, not when you paid them. This matters for things like prepaid insurance or subscription renewals that span multiple years. Your accountant or accounting software should handle this, but it’s worth understanding the principle.
Misunderstanding the 50% Entertainment Rule
This one trips up almost everyone at some point. A client lunch is 50% deductible. A Christmas party for staff is 50% deductible. But coffee and snacks during a workshop at your office? That’s 100% deductible — it’s a business event, not entertainment. And meals you buy while travelling for work are 100% deductible. The distinction matters and the IRD looks at it closely.
How to Get Your Expense Claims Right
The mechanics are straightforward once you know the rules. For sole traders and contractors, you claim expenses directly on your tax return using the IR3 form. Companies deduct expenses from taxable income. Partnerships split costs according to the partnership agreement.
At the end of each income year, you total up your income and expenses and file a tax return. Most people use accounting software or a bookkeeper to handle this. The IRD’s myIR system lets you file taxes and claim expenses online.
For vehicle claims, you have two options. The logbook method requires detailed records of business versus personal use for at least 90 consecutive days, then you claim that percentage of all vehicle costs. The kilometre rate method uses the IRD’s standard rates per kilometre for business travel — you still need accurate mileage logs, but you don’t need detailed expense records.
For home office claims, the square metre rate method simplifies things. For 2025–2026, the rate is $53.10 per square metre of dedicated workspace, plus a portion of actual costs for shared areas. If you don’t have a dedicated workspace, you can use the time-based method based on how much time you spend working versus using the room for personal purposes.
For entertainment expenses, keep detailed records: date, names of attendees, their businesses or roles, and the purpose of the entertainment. Best practice is to record the meeting in your business calendar with who was there and what it was about. This documentation is what the IRD will ask for if they audit your entertainment claims.
Frequently Asked Questions
Can I claim my home office if I work from a shared space like the dining table? ▾
What’s the difference between capital and revenue expenses for tax purposes? ▾
Do I need a separate bank account for my business expenses? ▾
Can I claim gym membership as a business expense? ▾
What happens if the IRD audits my expense claims? ▾
Getting Overheads Right Is a Business Skill, Not Just a Tax One
Understanding your overhead expenses isn’t really about tax — it’s about knowing what your business actually costs to run. The businesses that do this well don’t just file better tax returns. They make better decisions about pricing, investment, and growth because they know their numbers.
The rules from the IRD are clear enough once you know where to look. The nexus test, the 50% entertainment rule, the logbook requirement, the 7-year record retention — these aren’t arbitrary hurdles. They’re the framework the tax system uses to distinguish between a genuine business cost and a personal expense dressed up as one.
If this was useful, you might also want to read New Zealand Firms Struggle With Overwhelming Ad Expenses.
Remember: this article is general information only. For advice on your specific situation, speak to a qualified professional.
Sources and Further Reading
The Power of Networking: Building Meaningful Connections in the NZ Business Community — Practical strategies for building business relationships that can help reduce costs through shared resources and referrals.
IRD (2025). Types of business expenses. 🔗
Business.govt.nz (2025). Claiming expenses. 🔗
IRD (2025). Record keeping. 🔗
Eastmure & Associates (2025). Business expenses NZ — the complete guide. 🔗
Kiwitax (2025). Claiming expenses for your business. 🔗
