There are a number of tax issues arising with direct impact on the rural sector.

Over the next month we will distribute newsletters which cover the key points with the aim of raising your awareness of the changes, and putting you in a position to consider any action required.

As always, please give us a call, or send us an email if you have any questions.  We have a specialist tax lawyer Colin Gray in the office, so this provides us with the unique ability to provide you detailed tax advice.  Colin’s details are below if you have any tax questions.

In this newsletter we will deal with two areas, both of which involve houses on farms.  One relates to the main farmhouse, and the second to accommodation provided to employees.

 

Farmhouse Expenses

June 2017

IRD have been scrutinising what farmers claim in relation to farmhouse expenses and have given new guidelines as to what they consider acceptable.

These changes will apply from 1 June 2017 for Dairy and from 1 July 2017 for Sheep and Beef depending on your balance date – so it’s worth thinking about now.

It has been common practice for farmers to claim 25% of many farmhouse expenses and 100% of others.  This will now change and for the majority of farms the 25% will fall to 20%, but before that there is a first hurdle that needs to be jumped.

IRD are splitting farms into two types:

• Type 1 farms – where the value of the farmhouse is 20% or less of the total value of the farm
• Type 2 farms – where the value of the farmhouse is more than 20% of the total value of the farm

It will be critical to establish your farm type first, because for Type 2 farms the rule changes will mean that IRD will not accept an automatic claim of 20% and, instead, more work will need to be done to calculate the percentage claimable.

The following table helps summarise what is allowable under Type 1 and Type 2 farms:

Farm type	Interest and rates	General farmhouse	Fixed line telephone
	charges	expenses	charges
Type 1 farms	100% deduction for	Dissection* where possible,	50% of   telephone/internet
	rates and interest	then 20% deduction	rental charges used   for both
	expenses relating   to	unless the taxpayer   can	business and   private purposes,
	the farm, including   the	substantiate a   higher	unless the taxpayer   can show
	farmhouse.	deduction.	that 50% is too   low.
Type 2 farms	Dissection* where possible, then apportion between farm		50% of   telephone/internet
	and farmhouse on a fair   and reasonable basis.		rental charges used   for both
	Deduct amounts   attributed to actual business use of the		business and   private purposes,
	farmhouse.		unless the taxpayer   can show
			that 50% is too   low.

 

*Where the above table refers to dissection, that means that if an expense is directly attributable 100% to business or private then it is treated in that manner for tax.  Where the expense has both a business and a private use (for example house power or insurance), then the apportionment rules in the table must be followed. 

For those of you who complete your own GST records please bear this in mind – you may need to make changes ready for your next GST return.

If you are already in the 2018 financial year and have filed a GST return under the old rules, don’t worry, we will fix that up for you when we do the annual accounts.

 

Employer provided accommodation

Accommodation provided to employees generally gives rise to taxable income for the employee.  The level of income is required to be calculated using the market rental value of the accommodation.

The Inland Revenue Department has recently released a document outlining how market value should be determined (ref CS 16/02 should you wish to read the whole document! www.ird.govt.nz/technical-tax/commissioners-statements/cs-16-02-market-rental-value-html.)

In essence the aim is to estimate the amount that would be paid for the accommodation in question if that accommodation was available for rental on an arms length basis (i.e. to someone who is not an employee).

The Inland Revenue Department sets out the factors that should be considered in determining market rental.  These inclue:

• location – desirability, access to amenities, building values, security
• condition of accommodation
• functional characteristics – restrictions on visitors.

In practice it is now necessary to apply some thought as to what value is used.  It is also important to document the process, factors considered and evidence used to arrive at the rental value.  Historically it is fair to say the approach has often been in the rural sector to just use a $ figure without a great deal of consideration.  This will no longer work.

This might entail using a valuer, or rental agency or researching accommodation available in the area or in similar locations.

We absolutely believe that for many farming businesses arriving at a market value will present practical difficulties.  Nonetheless it is important to make every effort to review this area.  We expect Inland Revenue Department audit activity is likely on this point.

As always, please call if you wish to discuss.

 

                       

Colin Gray

PS Alexander & Associates Limited

03 364 9346

colin@alexanders.net.nz