Farmhouse Expense Claims
Changes in "farmhouse" expense deductibility took place a while ago but some people may still be using the previous interpretation when preparing their own GST returns.
"Farm" for this purpose includes all agricultural or horticultural land.
It has been common practice for farmers to claim 25% of many farmhouse expenses and 100% of others. However with the rise of lifestyle blocks and smaller orchards IRD have had a rethink and back in 2018 made changes to their interpretation of the law.
The approach that has been developed by the Commissioner of IRD distinguishes between farms based on the value of the farmhouse (including curtilage and improvements) as a proportion of the total farm value a:
- Type 1 farm: farmhouse is 20% or less of the total value of the farm and
- Type 2 farm: farmhouse is more than 20% of the total value of the farm.
Deductions for a Type 1 farm (big farms)
100% deduction of interest and rates relating to the property including the farmhouse.
Specific dissection where possible then a 20% claim for other farmhouse expenses unless a greater % can be substantiated.
50% of phone and internet unless it can be shown this is too low.
Deductions for a Type 2 farm (smaller farms and/or flash houses)
Specific dissection where possible then apportion between farm and farmhouse on a fair and reasonable basis. Deduct amounts attributable to the actual business use of the farmhouse.
50% of phone and internet as above.
Type 2 is more along the lines of the other recent development at IRD concerning the dual use of premises, previously referred to as a home office claim…
Until the 2017/18 income year taxpayers had to apportion every expense relating to the home premises between business and private portions.
The square metre rate option was introduced in 2017, and Inland Revenue has now published guidance on how to use it.
Taxpayers still need to apportion costs related directly to the premises – i.e. interest on the mortgage, rates and rent.
However if taxpayers want to use this option, they will not have to keep detailed records of utility costs (electricity, gas, insurance, phone and internet charges) or apportion these costs between business and private use of the residence.
For the 2020 year the deduction for these costs is calculated by multiplying business use square metres x $42.75.
The square metre rate option certainly saves time but it may result in a higher or lower deduction depending on individual circumstances.
If we have all the information we can work out which method is more advantageous, however ultimately it is up the taxpayer to decide how much record keeping they wish to do with these non-core business expenses.
As usual when tax details are fiddled with we see some anomalous results - where the genuine business area is large ie a large garage set up entirely for business purposes the square metre rate can give a very large deduction, definitely not what IRD envisioned.
The area value can also get more complicated - where it is not full time business use there is an expectation that a business usage % will be factored in if the private use aspect is significant.
A company generally has to account for FBT on any free or subsidised goods or services provided to employees (including shareholder employees).
The goods might include gifts, clothing, a pair of glasses, and services maybe a medical check up, eye test, a club membership or an accompanying spouses travel on a business trip none of which need to be related to the business activity. Interestingly this can apply to food and drink or a meal out if it is consumed privately and is not business related.
All such purchases must be invoiced to and paid by the Company to qualify (please note that if the purchase is a voucher there is no GST claim).
There is a maximum exemption per employee of $300 per quarter if you are not registered for FBT and $22,500 per annum in total for all employees. If these thresholds are exceeded then FBT is payable on the whole amount.
If you are registered for FBT, which we try and avoid, then you could be a quarterly filer or perhaps an annual or income year filer (which allow $1,200 per year with no quarterly restriction).
Expenditure within the FBT exemption limits are deductible to the company for income tax purposes.
A reminder about this legislation change mentioned in our March 2020 newsletter.
The threshold for 100% year one write off for asset purchases costing less than $500 was raised to less than $5,000 from 17 March 2020.
This was to encourage businesses to keep investing and reduce the tax cost in view of the impact of COVID 19.
However this incentive only lasts until 16 March 2021 after which the threshold will revert permanently to a new threshold of less than $1,000.
So, if you are thinking about purchasing an asset costing less than $5,000 for your business (including rental properties) and would benefit from a 100% write off rather than annual deprecation over several years then you should purchase the asset before the 16 March 2021 deadline.
It appears that when depreciation on buildings was ceased from the 2012 year that NZ became one of the very few countries in the world where buildings did not depreciate (at least for tax purposes).
For the current 2021 tax year commercial and industrial buildings once again become depreciable for tax purposes.
The applicable depreciation rates are 2% diminishing value or 1.5% straight line.
Please note that the IRD says "Residential buildings are not part of these depreciation changes. This is because they depreciate at a much slower rate."
Concrete block of flats not depreciable, concrete office block depreciable. More anomalies never mind any leaky building fun!
A belated happy, healthy and prosperous New Year to all our clients
From the team at