Farmers to see changes to farmhouse deductibility
A recently released Farmhouse Expenditure Interpretation Statement considers the deductibility of expenditure relating to a farmhouse that forms part of a farming business. With farmers spending an increasing amount of time in the office, or at the kitchen table, as the case is for many farmers across New Zealand, the changes may come as a surprise.
The position until the 2018 income year
The concession allowed a flat 25% deduction for farmhouse expenses without any evidence. It also allowed a 100% deduction for interest and rates.
The position for the 2018 income year onward
The previous interpretation/position has been withdrawn. This change in policy will apply from the start of 2017-18 financial year.
The new policy distinguishes between two types of farmers, referred to as type 1 and type 2.
Type 1 Farmers
A type 1 farmer includes sole traders and partnerships operating a farm where the value of the farmhouse is 20% or less than the total value of the farm.
It is important to note that if farmers fail the type 1 test based on cost, they can apply for a market valuation to ensure they pass the test. This would be relevant, for example, when a farm has been owned for a significant period of time, but a new farm house has been recently built.
Type 1 farmers are able to claim an automatic 20% deduction for farmhouse expenses (without evidence) and a 100% deduction for interest and rates.
For claims in excess of this, supporting evidence will be required.
Type 2 Farmers
A type 2 farmer includes farming operators where the farmhouse value is more than 20% of the value of the farm.
This could be the likes of kiwifruit farms, orchardists and the bloodstock industry where the farming activity is full-time but the cost of the farmhouse relative to the total farm is significant.
The IRD will not accept a minimum percentage deduction for type 2 farmers.
These farmers may only claim deductions for interest, rates and expenses relating to the actual use of the farmhouse.
Type 2 farmers will need to undertake a “home office” type calculation based on the actual use (time and space) of the farmhouse to determine the percentage of expenses that may be claimed for business purposes.
Those who fall into the type 2 category could find the new interpretation has a reasonable impact on their “bottom line”.
What does this mean?
It is important farmers are prepared for potential changes to their deducibility, including that they may need evidentiary proof to support higher farmhouse deductions. If you have any questions relating to the above, please contact your Findex adviser.