Inland Revenue considers updating farmhouse expenses rules

Inland Revenue considers updating farmhouse expenses rules

14 October 2016

Inland Revenue is looking to bring tax accounting practice regarding farmhouse expenses into line with the law.

This is all part of a review of out-dated practices and policies.

The practice of full-time farmers deducting 25% of farmhouse expenses without needing to provide evidence of their business use has been accepted by the department since the 1960s.

Farmers have also been able to deduct 100% of rates bills and interest costs on loans.

Inland Revenue Group Tax Counsel Graham Tubb said this has allowed some farmers to claim deductions for private spending.

Under proposals that go out for consultation today, the farmhouse adjustment will more strictly follow the law so farmers are treated like other businesses.

It’s suggested that farms, where the cost of the farmhouse is less than 20% of the total value of the farm, will still be able to claim a 100% deduction on interest costs.

However, deductions on rates related to the house and general farmhouse expenses would be at a new flat rate of 15% unless the taxpayer can provide evidence to substantiate a higher claim.

“It’s going to be generally business as usual for large farms except the automatic deduction will be based on 15% of farmhouse costs rather than the previous 25%.

“We see the proposed rule changes mostly affecting smaller operations or lifestyle blocks.

“These concessions have been able to be applied even in cases where farming isn’t the household’s main source of income and that’s not in keeping with the intent of the rule.

“Other industries have long had to provide evidence of business use when using their house for work purposes so it’s only fair and equitable that farming gets the same treatment.”

Where the cost of the farmhouse is valued at more than 20% of the total farm’s value, then deductions can only be claimed on expenses attributable to actual business use.

The rules would only affect farms being run by sole traders or in partnership. Those in trusts or companies are subject to different regimes.

“Business deductions certainly remain under these proposals but we’re looking to remove the practice of using the farm to claim for private spending.”

“We have already spoken with Federated Farmers and other industry groups in determining our revised position. However, we look forward to receiving submissions from farmers and their accountants affected by the change.”

The changes will apply from the start of the 2017-18 year after submissions have been considered.

The consultation document can be read here: http://www.ird.govt.nz/public-consultation/current/ and the deadline for submissions is December 22.

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