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Income Tax Act 2007

Deductions - Employee or contractor expenditure

DC 1: Lump sum payments on retirement

You could also call this:

“Explaining when businesses can claim deductions for retirement and redundancy payments”

If you run a business, you can claim a deduction for a lump sum payment you give to an employee when they retire. This payment could be a bonus, gratuity, or retiring allowance.

You can also claim a deduction for lump sum payments in other situations. These include when an employee’s job ends because of redundancy, loss of office, or similar reasons. It also applies to former employees who can’t be rehired for seasonal work in circumstances that would be seen as losing their job if it happened in regular employment.

However, you can’t claim this deduction if you’ve already agreed to pay the amount as employment income under section DC 10(1)(c).

The deduction is counted in the income year when you make the lump sum payment.

This rule adds to the general permission for deductions and overrides the capital limitation. But remember, other general limitations still apply.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1513758.

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Part D Deductions
Employee or contractor expenditure

DC 1Lump sum payments on retirement

  1. A person who carries on a business is allowed a deduction for a lump sum paid as a bonus, gratuity, or retiring allowance to an employee on retirement.

  2. For the purposes of subsection (1), a lump sum paid on retirement includes a lump sum paid to—

  3. an employee when they end their employment or service through redundancy, loss of office, or similar circumstances:
    1. a former employee when they are unable to be reemployed in seasonal work in circumstances that would be considered the loss of employment or service through redundancy if they resulted in ending the seasonal work.

      1. This section does not apply to the extent to which the person has accepted a liability, as described in section DC 10(1)(c), to pay an amount of employment income.

      2. The deduction is allocated to the income year in which the lump sum is paid.

      3. This section supplements the general permission and overrides the capital limitation. The other general limitations still apply.

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