Possible changes to the deductability of farm house expenditure
Rory Noorland, Associate and Chartered Accountant, CooperAitken.
Changes are being proposed by Inland Revenue regarding to the deductibility of farm house expenditure. This replaces a number of long-standing policies concerning the deductibility of expenses relating to farms and farmhouses. These policies originated in the 1960s at a time when farm ownership and operating structures were generally less complicated than they are today.
Although agreeing with many parts of the initial draft Interpretation Statement, in our view, certain aspects overstepped the mark and was unfair to taxpayers. On this basis we provided a submission, both in writing and verbally, to Inland Revenue. We advocated for a number of changes to soften this impact and in particular for farmers that would fall within a Type 1 farm. You can find a copy of our submission here.
The main changes on which we submitted and subsequently changed in the final version, to the benefit of taxpayers, are;
- Minimum deduction has been increased from 15% to 20% without having to prove the apportionment percentage
- Allowing a 100% deduction for rates for a Type 1 farm
- Adding in extra examples for determining a Type 1 vs. Type 2 farm through the use of reasonable estimates
A summary of taken from the Interpretation Statement from Inland Revenue will allow a deduction for farm house expenditure to be calculated is as follows;
The Commissioner will accept a practical approach to apportioning farmhouse expenses. This approach has been developed to mitigate compliance costs for farms with a low private-use element. The approach is based on a new distinction between:
- Farming businesses where the value of the farmhouse (including curtilage and improvements) is 20% or less of the total value of the farm (Type 1 farms); and
- Farming businesses where the value of the farmhouse (including curtilage and improvements) is more than 20% of the total value of the farm (Type 2 farms).
The value of the farmhouse (including curtilage and improvements) and farm can be used to determine the extent of the private use of the farmhouse. The Commissioner will accept a formal valuation or a reasonable estimate of the values of the farmhouse (including curtilage and improvements) and farm. To reduce compliance costs, the respective costs of the farmhouse and farm may also be used to determine whether the farm is a Type 1 or Type 2 farm.
Farmers who live in the farmhouse on Type 1 farms may determine whether expenses are deductible under the general permission and general limitations as set out in this Interpretation Statement. However, the Commissioner will also accept that 20% of the farmhouse is used for business purposes without any supporting evidence. As a result, such farmers can claim 20% of all farmhouse expenses as deductible business expenses. In addition, these farmers may continue to claim 100% of the interest costs relating to the farmhouse and 100% of rates.
Farmers who live in the farmhouse on Type 2 farms must determine whether expenses are deductible under the general permission and general limitations as set out in this Interpretation Statement.
Farmers who operate their business from home may claim 50% of their telephone rental charges, unless they can show that the actual business use of the telephone is greater than 50%. This is the existing practice for other home based businesses.
We will keep you updated regarding any changes that may be implemented by the IRD.