Deductibility of expenses when there is no income-earning activity

2012 Canterbury earthquake provision covering the deductibility of expenditure when there is no income-earning activity.

Section DZ 20 of the Income Tax Act 2007

After the Canterbury earthquakes, some taxpayers were no longer able to deduct their expenses or losses relating to their income-earning activity. Their activity was so disrupted by the earthquakes that there is no longer a sufficient nexus between the expenses or losses and their activity.

For example, some rental properties or business premises situated in the Christchurch CBD red zone have become untenanted or forcibly closed because the premises are not physically accessible. Given there is no income-earning activity, on-going expenses such as rates may not be deductible under the general permission in section DA 1 even if the activity subsequently resumes.

Key feature

A person whose income-earning activity in greater Christchurch was interrupted by a Canterbury earthquake, may receive a deduction for expenditure relating to the income-earning activity in the year in which that activity resumes. This applies only when the income-earning activity is resumed before the 2016-17 income year.

Detailed analysis

New section DZ 20 provides certainty on the deductibility of expenses or losses for affected taxpayers who intend to continue their income-earning activities. To qualify for this relief, a person must meet all of the following conditions:

  • the person has an income-earning activity in "greater Christchurch" (as defined in section 4 of the Canterbury Earthquake Recovery Act 2011) immediately before a Canterbury earthquake (as defined in that section);
  • the income-earning activity is interrupted for a period (the period of interruption) as a result of the Canterbury earthquake;
  • in the current year, during the period of interruption, the person incurs expenditure or loss (the interruption expenditure) in meeting an obligation relating to the income-earning activity;
  • the interruption expenditure does not meet the requirements of the general permission in section DA 1 but would do so but for the interruption; and
  • the person resumes the income-earning activity in an income year (the resumption year) before the 2016-17 income year.

If all of these conditions are met, the person is allowed to deduct the interrupted expenditure in the year their income-earning activity is resumed. This new section supplements the general permission in section DA 1. The general limitations in section DA 2 still apply.


Victoria carries on a dry cleaning business as a sole trader in the Christchurch CBD. She has a loan for the business that requires a $2,000 monthly interest payment. After the earthquake of 22 February 2011 she was no longer able to access her business premise. She temporarily stopped her business activity while considering whether to continue the business elsewhere.

Without new section DZ 20, Victoria would not be able to deduct the interest payments on the business loan since February 2011 because there is no dry cleaning business so there is no longer a sufficient nexus between the interest expenditure and an income-earning activity.

In September 2012, Victoria resumes the same dry cleaning business in Hoon Hay. She can deduct $40,000 ($2,000 x 20 months) interest incurred on the business during the interruption period in the 2012-13 income year

Application date

The amendment applies for the 2010-11 to 2015-16 income years.