The importance of using the market value for your propertyRory Noorland, LLB BMS CA, Chartered Accountant, Associate, CooperAitken
The Commissioner of Inland Revenue has recently released guidance on determining the market value of accommodation that is provided to employees.
When an employer provides free, or subsidised, accommodation to employees, the market rental value of that accommodation is taxed as income of the employee. It is the employer’s primary responsibility to estimate the market rental value of the accommodation on a reasonable basis and to ensure that tax on the amount is returned. This means that PAYE must be paid on the market rental value of the accommodation.
Note; this also applies in the situation where a market rental is required for shareholder-employees where the farm is operating under a company structure.
However, when the accommodation is owned by the employer it is necessary to establish its market rental value.
Absolute accuracy is not expected, but a reasonable and appropriate process must be followed and documented when estimating the market rental value. Failing to properly document the process taken to determine the value will make it possible for Inland Revenue to apply penalties in that situation.
Following approaches to determine a market rental value are considered acceptable to the Commissioner:
- a valuation from a registered valuer;
- an estimate of the market rental value from a real estate agent, property manager, or other suitably experienced person;
- a review of comparable properties on internet sites that advertise rental properties, for example, Trade Me;
- any other reasonable basis that takes into account the features of the accommodation being provided and compares it with similar accommodation.
In the case of a valuation provided by a valuer, real estate agent or property manager, this could be a letter that sets out the valuation, how it was reached, and the factors and information taken into account.
When an employer reaches their own estimate of the market rental value, for example, by using Trade Me, it is important to ensure that comparable properties are used for the basis for the valuation. This may include printing out the listings of the properties that were used as a comparison, recording the rental being sought for those properties, and recording why they were considered to be valid comparisons.
It should be noted that the Commissioner does not believe that a discount on the market value rental can be applied for the fact an employee is required to live on farm in a specific dwelling.
The value of the accommodation should be reviewed at least every three years and adjusted accordingly, either up or down.
As we begin a new financial year for with our farm workers it is an opportune time to review the market rental values that are being used for any accommodation provided to them.
If you have any questions, or would like us to review your assessment of market value, please contact CooperAitken on 07 889 7153.