Farmhouse Expense Deductibility Has Changed

New Zealand Inland Revenue has changed the rules on Farmhouse Expenses

As most farmers and vineyard owners have started their 2018 financial year, now is a good time to talk about the new rules around farmhouse expenses.

Prior to the 2018 financial year, Inland Revenue has allowed a concession to farmers and vineyard owners that permitted a flat 25% deduction for farmhouse expenses, along with 100% deductions for interest, rates and telephone rental.

From the start of the 2018 financial year, the new rules around farmhouse expenses apply. The new rules have two tiers, Type 1 and Type 2 farms. To qualify for Type 1 rules, the value of the farmhouse (including curtilage) must be less than 20% of the total farm value. All farms and vineyards that fall outside the Type 1 determination, must follow farm Type 2 rules.

Type 1 farms now have an allowable flat rate deduction of 20% for farmhouse expenses. 100% deductions for interest and rates remain for Type 1 farms. While Type 2 farms must apportion farmhouse expenses to actual business use of the farmhouse.

Both farm types are now only allowed a default deduction of 50% for telephone rental. As for all expenses, if you can show that actual business usage is higher than the default rate, you may claim a higher amount.

The table below summarises the new rules:

  Interest and Rates Charges General Farmhouse Expenses Fixed Line Telephone Charges
Farm Type 1 100% Deduction for rates and interest expenses relating to the farm, including the farmhouse 20% Deduction unless the taxpayer can substantiate a higher deduction. 50% of telephone rental charges used for both business and private purposes, unless the taxpayer can show that 50% is too low.
Farm Type 2 Apportion between farm and farmhouse on a fair and reasonable basis. Deduct amounts attributable to actual business use of the farmhouse 50% of telephone rental charges used for both business and private purposes, unless the taxpayer can show that 50% is too low.

 

Farm Type Determination
Farm Type 1 Farming businesses where the value of the farmhouse (including curtilage and improvements) is 20% or less of the total value of the farm
Farm Type 2 Farming businesses where the value of the farmhouse (including curtilage and improvements) is more than 20% of the total value of the farm.

Your friendly Advisor at WK is happy to discuss the effects of the new rules on your business, or help you determine what farm type you are.

For help on editing Bank Rules in Xero, please follow this link https://help.xero.com/BankAccounts_BankRules_Edit