Skip to main content
23 Nov 2007
Appeal Status
Not appealed

Timing of deduction for accounting services

2007 case note - Taxpayer is allowed a deduction in the income tax year which the expenditure is incurred - definitively committed, legal obligation to make payment.

TRA Decision Number 14/07


The taxpayer is allowed a deduction in the income tax year which the expenditure is incurred. Expenditure is incurred when the taxpayer is definitively committed to the expenditure, a legal obligation to make payment in the future has accrued, the expenditure must be more than impending, threatened or expected and theoretical contingencies can be disregarded. The taxpayer did not incur the expenditure (accounting fees for the 2003 financial statements and returns of income) until 2004 and accordingly, could only deduct those fees in 2004 - not 2003 as claimed.


This case concerns the timing of deductibility of accounting fees.

The Disputant is a limited liability company. It entered into an agreement with its chartered accountants on 6 March 2000 which confirmed "the terms of our continuing appointment to provide accounting services; the nature of those services". In relation to the annual financial statements, the accountants would "bill as the work is performed. These progress billings will be shown in the final bill which will detail the total cost for those statements".

On 31 March 2003 the Disputant accrued $2,285.00 as "being estimate of 2003 fees" and subsequently claimed a deduction in it's 2003 income tax return. The accounting services for the $2,285 were, however, performed and invoiced in the 2004 income tax year.


The Taxation Review Authority ("TRA") confirmed that it is settled law that expenditure can only be deducted if it can be brought within the terms of the Tax Acts and, referring to both the Privy Council and Court of Appeal in Mitsubishi Motors Ltd v The Commissioner of Inland Revenue, accounting principles and good commercial practice cannot be substituted for the statutory test of deductibility.
A deduction must be allocated to the income year in which it is incurred. The principles of "incurred" are also settled law and the principles can be summarised as:

  • Expenditure is incurred in an income year even if there is no actual disbursement.
  • Expenditure is incurred if the taxpayer has "definitively committed" itself to that expenditure.
  • It is not sufficient that the expenditure be merely "impending, threatened or expected".
  • There must be an "existing obligation" and whether, in light of all the surrounding circumstances, a legal obligation to make a payment in the future has said to have accrued.

Where the expenditure arises under a written agreement, whether or not it constitutes an existing obligation is a question of the construction of the deed or agreement.

On the facts of this case, the Disputant may have had statutory obligations to prepare financial accounts and returns of income but it did not have a statutory obligation to pay its accountants to prepare those financial statements and returns of income. The contractual relationship was only that, if the accountants performed work, they would bill the Disputant as the work was performed. As at 31 March 2003, the Disputant was not contractually bound to have the accountants prepare the financial statements and returns of income. On 1April 2003 the Disputant could have ceased using the accountants and used other means (itself or other agents) to prepare the financial statements and returns of income. This is reinforced because, if contractually bound, the Disputant would be liable here for an unquantified rate of payment.

As the legal obligation to make payment only arose upon work being completed and invoiced for, the Disputant was not definitively committed to the expenditure at 31 March 2003. Accordingly, it had not incurred the expenditure in the 2003 income tax year and was not entitled to the deduction in that year.

The TRA noted that it seems basic that if a taxpayer seeks to deduct accountancy fees in a particular year, then as a general rule that service needs to have been provided in that particular year. Any accounting practice to deduct fees in an earlier year for work done some months later is, as a matter of law, a wrong practice. The TRA left open the possibility that there may be merit in the argument that a pre-commitment on a commercial basis for accounting services to be provided after the end of revenue year in question creates a debt incurred in the earlier year

Income Tax Act 1994, sections BD2, BD4 and DJ5(1)