11 March 2021
Farm employers who provide accommodation for their employees may be impacted by a recent amendment to the Residential Tenancies Act (1986) (the Act), which could have a significant impact on the required standard of farm housing.
The Act, which covers items such as insulation, heating and smoke alarms amongst other things, applies to employees who receive accommodation as part of their remuneration package, called a service tenancy.
Service tenancy agreements are covered by the same rules that apply to a typical landlord tenant relationship, apart from a couple of minor exceptions regarding rent and the ending of the tenancy. Service tenancies are tied to an employment agreement, which means the employee’s tenancy comes to an end when the employment ends.
A service tenancy essentially requires employers to provide accommodation to employees for no cash cost, however, employees are taxed on a nominal rent as part of the wage calculation. This amount often ranges between $100-$200 each week.
With the amendment to the Act, the law now requires employers to charge a “market value rent”. So, how do you work out a value?
Market value rental can be calculated in a number of ways:
- Engage a registered valuer, real estate agent, property manager or a suitably experienced person.
- Compare to comparable rental properties of a similar nature that are currently rented in the area.
- Any reasonable basis that considers the features of the accommodation being provided and compares it with similar accommodation.
So, what does this mean for employers? Well, if you are renting the house down the drive way for $280 a week to a third party and then charging your employee $100 a week for a house that has similar features, you will likely have an issue. You should also consider the increase in house prices and life style blocks popping up in country areas across New Zealand, that have caused large rental increases across the country.
If an increase to an employee’s accommodation allowance is required to match ‘market value rent’, it’s important to remember the employee’s taxable income will increase. This means the employee will pay additional tax on the increased rental value and their take-home pay will be reduced.
If IRD reviews your farm business, they will require evidence of how you, as the landlord, calculated the rent charged to your employees. If IRD decides the rental is not reflective of market value, they could calculate underpaid tax for up to seven years. To avoid this issue, I recommend you review the market value rent on each of your employee’s houses on a regular basis.