The latest IRD Business Tax Update for October 2017 has been released. For information on changing PAYE returns and the new provisional tax method read here
In March the Inland Revenue announced new rules for the deductibility of farm house expenses where the farming entity is a partnership or individual and they are living in a dwelling on the farm.
Historically all full-time farmers have been permitted to claim full deductions on dwelling rates and mortgage interest and also claim 25% of farm house expenses.
For the commencement of the taxpayers 2017-2018 tax year, the deduction allowed on farm house related expenses will depend on the value of the farm house relative to the value of the total farm.
Inland Revenue has created two ‘classes’ of farm:
A Type 1 Farm is one where the value of the house & curtilage is less than 20% of the total farm value, most farms will fall into this group. Type 1 farmers are able to claim 100% of the rates and interest on the farm and 20% of the dwelling expenses – repairs, electricity, insurance etc.
A Type 2 farm is where the value of the house (including curtilage and improvements), is greater than 20% of the farm. A farmer with a Type 2 farm is required to do a ‘use of home office’ claim and any deduction for house expenses are limited to the actual use of the home for farm purposes.
For example, a farmer on a type 2 farm has no dedicated farm office, but uses 30% of the house for business, 25% of the time; using the kitchen, dining room table, lounge and laundry for business purposes at different times. Based on this, they can claim 7.5% (30% of area x 25% of time) of house expenses, interest and rates as a deductible expense.
In addition the deductibility of the home telephone rental for both type 1 and type 2 farms is reduced to 50%, unless a higher business use portion can be warranted.
How is a farm valued?
The Commissioner will accept a reasonable estimate of valuation for the farm house and farm when applying the Type 1/Type 2 test. This may be done using rateable values, a Bank valuation, historical cost, insurance values or a formal valuation.
When considering the value of the farm, the value will include the value of the farm land and all assets attached to it. This would include all buildings, vines and shelterbelts but would exclude stock and crops. The land would include all blocks of land being farmed together, even if they are on different titles, locations or leased.
What does this mean for you?
Firstly you need to determine if you are a Type 1 or Type 2 farm.
If you are claiming 25% of your dwelling expenses for GST and you believe you are a Type 1 farm you should reduce this to 20% in your next GST return.
If you are a Type 2 farm you will need to calculate your actual business use of your home and use this percentage claim in your GST returns.
Generally if you are farming as a Company or Trading Trust this does not affect you.
If you have any queries or issues please do not hesitate to contact us.
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