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12 Oct 2017
In March 2017, IRD issued a new interpretation statement on the deductibility of farmhouse expenses, introducing a completely new method of calculation. The new rules are effective from the beginning of the farmer’s 2017/18 financial year.
Previously full-time farmers could claim 25% of the general farm house expenses (repairs, power, insurance etc), 100% of the rates and mortgage interest, and 100% of telephone rental.
The full-time farmer concept has been replaced by a farmhouse value test. A calculation of the dwelling, curtilage and associated improvements value as a percentage of the overall total property value needs to be performed. If it is 20% or less, it is a Type 1 farm; more than 20% is a Type 2 farm. This is a one-off test, unless there is a change in the components, e.g. a farmhouse extension or acquisition of additional land, which may result in a swap between Type 1 & Type 2 categories.
The IRD will accept a reasonable estimate of the valuation including rateable values, bank valuation, insurance values, real estate agent’s appraisal, historical cost or formal valuations.
Rateable value is probably the easiest but does not distinguish between domestic and farm improvements. It would be suitable where the value of all improvements is less than 20%
With historical cost, the costs must relate to comparable dates. i.e. if the farm and improvements were acquired together it would be acceptable, but not if the dwelling was built on the property say 40 years after the land was acquired.
Where the test produces a figure close to 20%, a formal valuation may be required to maximise the claim.
The new rules for deductions are:
Rates and Mortgage Interest:
Household Expenses such as repairs, electricity and insurance, but not capital expenditure:
Type 1 farmers are now permitted a 20% deduction without needing supporting evidence. It is possible to get a higher claim but the area of the dwelling and the time used for business purposes need to be considered (“home office calculation.”). The percentage calculation only applies to joint use type expenses, after first extracting those expenses which are purely business or purely private.
Type 2 farmers have no minimum claim amount and must undertake a “home office” calculation (as above).
Telephone Rental and Fixed Line Charges
The standard claim for phone line rental has been reduced from 100% to 50%. If it can be demonstrated that business use is greater than 50%, a higher claim may be warranted.
Only business tolls are claimable. However, with so many different plans such as nationwide calling at a fixed fee, the split of average usage between business and private will determine the extent of deductibility. It is important to provide your accountant with a copy of your standard phone charges and discuss the realistic split of costs, particularly for the internet and toll components.
These new rules do not affect claims for houses rented out or provided to employees, where 100% claim can still be made. Note however that there will be no GST claimable (residential rental). Employees must either pay market rent or have that value added to their wages and have tax deducted if a free rental. Also note that the value of a free rental can be included as part of the gross wage when calculating the hourly rate (e.g. for minimum pay rate calculations.)
The new rules are complicated, and are effective now! So see your accountant for advice.
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