Farmers to see changes to farmhouse deductibility

31/03/2017

Farmers to see changes to farmhouse deductibility

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 to the deductibility of farmhouse expenses may come as a surprise. “With changes impacting farmers for the 2017/2018 financial year, it is important they take the time to find out how the changes could affect them,” Tony Marshall, Agribusiness Tax Specialist for Crowe Horwath points out.

Since the 1960s the IRD has allowed full-time farmers a deduction of 25% of farmhouse expenses without any evidentiary support. Inland Revenue Group Tax Counsel Graham Tubb says that this has allowed some farmers to claim deductions for private spending.

Last week the IRD finalised the proposed Farmhouse Expenditure Interpretation Statement. A key part of the statement revolves around a distinction being made between farming businesses where the cost of the farmhouse, including curtilage and improvements is 20% or less of the total cost of the farm (Type 1 farms), compared to those where the value is more than 20% of the total cost of the farm (Type 2 farms).

“Where farmers fail the Type 1 test based on cost, they can apply a market valuation to ensure that they pass the test,” Marshall notes. “This would be relevant when a farm has been owned for a significant period of time, but a new farm house has been built recently.”

Marshall has summarised the notable highlights of the statement as follows:
20% default deduction for farmhouse expenditure for Type 1 farms, down from the previous 25% deductibility. Taxpayers remain free to complete their own calculation if the claim exceeds 20%
100% interest deduction for Type 1 farms
100% rates deduction for Type 1 farms
minimum 50% deduction for telephone rental costs.
“Any farmer who is not Type 1 will likely see a large drop in deductions for farmhouse expenses, particularly around interest. This will hit those particularly hard that fall into the Type 2 category, which 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,” Marshall adds.

“However Type 1 farmers will not go unaffected. They will still have a 5% drop in deductions for farmhouse expenditure such as repairs and maintenance, electricity and the likes. The telephone rental deduction could drop to 50% – not huge numbers in the whole scheme of things, but still a drop,” Marshall continues.

“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 they have any questions, they should contact their adviser,” says Marshall.

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