NZ Tax Considerations for Animation Expenses in Advertising

In New Zealand, the tax treatment of animation and advertising expenses depends largely on whether the costs are deemed capital (non-deductible) or revenue (deductible) in nature. A key consideration is whether the expense

·       provides an ongoing or enduring benefit to the business, or

·       is part of the regular, ongoing process of generating revenue.

Capital vs. Revenue Nature of Advertising Costs

The general principle for tax deductibility in New Zealand is as follows:

• Capital Costs: These are often considered investments in assets or long-term benefits and are not immediately deductible.  Instead, these costs may be depreciated if they meet the requirements for depreciable property.  This means the cost may be deducted or spread over the item’s useful life.

• Deductible Costs: These are ongoing business expenses that generate income or support business operations. Such costs do not create long-term assets and thus support ongoing revenue activities, making them generally deductible.

Factors to Consider When Classifying Animation Costs

When determining the tax treatment for animation costs, consider these factors:

1. Intended Use and Duration: An animation meant to be replaced frequently or used briefly aligns with revenue expenses, whereas long-term use implies a capital nature.

2. Useful Life: if a capital asset has a useful life of less than 12 months, it may be expensed.

3. Cost Threshold: If the asset’s cost is under $1,000, it may qualify as a low-value asset and can be expensed immediately.

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Practical Examples and Guidance

Let’s apply these principles with a few examples to demonstrate tax deductibility of animation costs:

• Example 1: Simple, Short-term Animation

·        A $200 logo animation for a website homepage.

Deductible: Likely a deductible expense if it serves an immediate advertising purpose without creating a long-term asset. Under the low-value asset threshold (assets costing less than $1,000), this animation expense may be directly expensed even if considered a long term asset with enduring benefit, provided it doesn’t form part of a broader asset (such as the website). 

• Example 2: Product Explainer Animations

$10,000 investment in a series of high-quality explainer videos expected to be reused for several years.

Non-Deductible (Capital): These videos offer an enduring benefit and contribute to brand development. However, should any individual video have a useful life of less than 12 months, it may qualify for immediate deduction.

• Example 3: Regular Advertising Campaigns

$300 monthly creation of social media reels for product launches.

Deductible: This is part of the regular advertising cycle, serving immediate promotional purposes without creating a capital asset.

·       Example 4: A client paid $2,500 for a 2D animation explaining a product, expected to be updated or replaced as new marketing content is developed.  This is fact specific i.e.:

 Deductible: Given its intended short-term use, and ongoing updates and expenditure, it may be classified as a deductible expense.

o   Non-Deductible (Capital): However, if this animation will provide an enduring benefit, for example it has a planned lifespan of more than 12 months, or it is designed as a User Manual, this expenditure should be treated as non-deductible capital expenditure.

Further considerations: Fixed Life Intangible Property (FLIP) and Blackhole Expenditure

Because most of these expenses create non-physical assets, also known as intangible assets, there are also further consideration as to whether these assets can be depreciated, or if the expenditure is effectively black hole expenditure.

Capitalised animation content may be eligible to be depreciated if it:

• Has a determinable useful life, such as animations that are part of a campaign expected to last a specific period.

• Be included in Schedule 14 of the Income Tax Act e.g. the right to use a design or model, plan, secret formula or process, or other like property or right.

If animation content meets these criteria, it can qualify as FLIP and may be depreciated over its useful life. Depreciating FLIP avoids it being categorised as a "blackhole" expense.

Blackhole Expenditure arises when an intangible asset does not have a fixed life or is not listed in Schedule 14 as depreciable intangible property. Such costs are capital in nature but non-deductible and non-depreciable, creating a permanent tax disadvantage. Examples of intangible assets that do not meet the requirements of Schedule 14 include Trademark expenditure.  In these cases, expenses remain as non-deductible capital unless they can be associated with another existing asset (e.g., a website).

Final Thoughts

When evaluating animation costs, it’s essential to determine:

• Business Intent: Whether the animation provides a long-term benefit or serves a temporary advertising function.

• Duration and Cost Thresholds: If the animation asset has a useful life under 12 months or costs below $1,000, it can be immediately expensed.

• Scope and Impact: Higher-cost animations that are core to brand development are generally treated as capital, whereas smaller, campaign-based animations are generally deductible expenses.

This article is for informational purposes only; we recommend readers seek personalised tax advice to address their unique circumstances, as tax treatments can vary based on specific facts.  The tax treatments discussed here are complex, fact-specific, and open to interpretation.  The IRD may hold differing views.