Is the PaidTerms Instalment Fee Tax Deductible?

Why the Fee Is Deductible

New Zealand does not work from a list of approved deductions. It works from a general rule, and the fee either falls inside it or it doesn't. That rule — the general permission — is section DA 1 of the Income Tax Act 2007. It allows a deduction for expenditure to the extent it is incurred in deriving assessable income, or in the course of carrying on a business for the purpose of deriving assessable income.

An instalment fee on a business purchase is squarely inside that. You incurred the cost in order to acquire trading stock, materials or equipment used to earn income. It is a cost of doing business, and it is a revenue cost rather than a capital one — you are paying for the use of money over a few months, not acquiring an asset.

Inland Revenue has also addressed this category of cost directly. Its interpretation statement IS 13/03: Income Tax — Deductibility of Borrowing Costs treats borrowing-related expenditure as typically deductible, listing items such as loan procurement fees, guarantee fees and the costs of arranging an overdraft. A fee charged for the facility to pay an invoice in instalments is the same kind of expenditure: a charge for arranging finance on a business purchase.

business.govt.nz puts the everyday version of the test plainly in its guide to claiming expenses: only the expenses you incur in generating your business income are deductible, and anything personal must be apportioned out or excluded.

The One Condition: Business Use

The deduction turns on what the purchase was for, not on how you paid for it. Two limitations in section DA 2 of the Act are the ones that bite in practice:

• The private limitation. Expenditure of a private or domestic nature is not deductible. If you used PaidTerms to buy something for personal use, the fee on that purchase is not a business expense.
• Apportionment. Where a purchase is partly business and partly private, the deduction follows the business proportion. The general permission applies “to the extent to which” the expenditure is incurred in deriving income — so a 70% business-use item gives you 70% of the fee.

In practice this is rarely a live question for PaidTerms transactions. The product is used by businesses buying from wholesalers, manufacturers and trade suppliers — packaging, building materials, commercial furniture, stock for resale, plant and equipment. Those are business purchases by definition, which is why the fee on them is deductible in full.

A Worked NZ Example

Customer instalment fees start from 3.95% of the invoice value and vary with the repayment term. Take a hospitality business buying a $20,000 commercial furniture order from a wholesaler and paying over three instalments:

The $790 fee is the deductible amount. At the 28% company tax rate, claiming it reduces your tax bill by $221.20, so the real cost of the fee is $568.80 — an effective 2.84% rather than 3.95%.

Note what this does not change: the $20,000 of furniture is accounted for exactly as it would be if you had paid cash on the day. Deductibility, depreciation and GST on the goods all follow their normal rules. The only additional item is the fee.

GST: Deductible, But Nothing to Claim

This is the part most people get the wrong way round, so it is worth being precise. There is no GST on the instalment fee, which means there is no GST input credit to claim on it — but it remains fully deductible for income tax.

The reason is that the fee is a finance charge for the provision of credit, and credit is a financial service. Section 14(1)(a) of the Goods and Services Tax Act 1985 exempts the supply of financial services from GST, and “financial services” is defined in section 3 to include the provision of credit. Section 10(5) carries this through to instalment arrangements specifically: GST applies to the cash price of the goods, and the finance charge component — the gap between the cash price and the total of the instalments — is outside it. Inland Revenue covers the mechanics on its special supplies page.

So on the example above, a GST-registered buyer claims the GST on the $20,000 of furniture exactly as normal, and claims no GST on the $790 fee because none was charged. Two separate items, two different treatments. Income tax deduction: yes, on both the goods and the fee. GST input credit: on the goods only.

If You're the Supplier: the Merchant Fee Is Deductible Too

The customer fee and the merchant fee are never charged to the same party. On the funded option — where PaidTerms pays the supplier upfront and collects from the customer — the supplier pays a flat 1.5% merchant fee and receives the balance of the invoice. That 1.5% is a deductible business expense on exactly the same basis as the customer's fee — and on exactly the same basis as the card-processing fees you already claim.

One bookkeeping point worth getting right: the fee is an expense, not a discount on the sale. On a $20,000 invoice you record $20,000 of income and a $300 expense, and you account for GST on the full $20,000 — you do not record a $19,700 sale. The net settlement arriving in your bank is the two entries combined, which is why it is worth having your accounting software split them rather than coding the deposit straight to sales.

For how this compares with the cost of carrying the receivable yourself, see the hidden cost of offering trade credit.

Frequently Asked Questions

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