Stung by parking fines? ... taking the hit may prove cheaper than fighting the IRD.
Denham Martin
Taxwise
Is it possible to claim a tax deduction for a parking ticket?
JD, Milford
Two legal hurdles must be overcome in order to sustain such a tax deduction.
The first is establishing a connection with the derivation of income. This can be either a direct connection with an identifiable receipt of income or an indirect connection with a business activity, which produces income. Establishing a sufficiently direct connection is problematic because it can always be argued that the taxpayer did not necessarily have to incur the parking fine if the taxpayer could have waited for a park to become available elsewhere or moved the vehicle within the parking time allowed.
Establishing an indirect connection with business income depends upon the nature of the business. A taxpayer carrying on, say, a courier business probably would be able to argue successfully that there is a commercial imperative to pick up and deliver items within a short timeframe that necessitates parking in less than ideal places where there is a real risk of incurring parking fines.
There have been some comments made by the Taxation Review Authority that support the basis for a tax deduction in that type of circumstance. However, for most business taxpayers the nature of their businesses would be such that it would be very difficult to establish that incurring parking fines was a necessary risk/cost of doing business.
If the taxpayer can establish the basis for a deduction, then the taxpayer must then overcome the second hurdle of establishing that it would not be contrary to public policy for a tax deduction to be allowed. A fine or penalty is generally accepted as being a mechanism to deter and punish proscribed conduct. That being so, allowing a taxpayer to claim a tax deduction lessens the economic cost of engaging in the proscribed conduct with the result that the intention of the lawmakers to deter and punish that conduct is frustrated.
Indeed, given that the deduction would presumably prevent a greater amount of tax being paid by the taxpayer, the allowance of a deduction can be viewed as a subsidy from other law abiding taxpayers who must shoulder a greater tax burden.
The counter-argument that can be made here is that the other taxpayers only need shoulder a greater burden if the Government is spending the full tax-take, which is a separate matter. Additionally, the fined taxpayer is still out-of-pocket for the net economic cost of the fine and hence is economically disadvantaged when compared to a law-abiding taxpayer.
It can also be argued that allowing a section of society to escape the full economic cost of infringing laws that apply to all is unfair. However, it is commonplace for business taxpayers to enjoy economic advantages over non-business taxpayers, so this argument is not particularly convincing.
While the attractiveness of the above public policy arguments depends upon one's socio-political perspective, it is pragmatic to note the position of Inland Revenue on the matter. In a recent draft policy statement on this issue, Inland Revenue states that fines and penalties are not tax deductible because the taxpayer would fail to establish the connection with income and/or allowing the deduction would be contrary to public policy. Any taxpayer wishing to claim a tax deduction must therefore be prepared to dispute these matters with Inland Revenue and it may well be that the strength of the taxpayer's case relative to the amount of money involved results in taxpayers electing not to pursue the point.
* Denham Martin is the principal of Denham Martin and Associates, lawyers specialising in advice on taxation and related matters.
