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Changes to Farm Dwelling Expenditure

On 23 March 2017 Inland Revenue finalised interpretation statement 17/02 Income Tax – Deductibility of Farmhouse Expenses.This interpretation statement changes how farm dwelling expenses are claimed for income tax purposes and how much can be claimed for GST purposes. This interpretation statement will apply from the beginning of the 2018 income year.This means for March balance dates, from 1 April 2017, May balance dates, from 1 June 2017 and for June balance dates, from 1 July 2017.

Under Inland Revenue’s current view farmers are, generally, entitled to claim full income tax deductions for both rates and interest payable on farm loans, despite the fact a proportion of these expenses relate to the farm dwelling. Furthermore, Inland Revenue has allowed farmers an income tax deduction and GST claim equal to 25% of expenditure incurred in relation to the farm dwelling, for example, electricity and dwelling repairs (special rules can apply to companies and trusts).

Under the announced changes, farmers are classified into Type 1 (essentially larger farms) and Type 2 farms (essentially smaller farms).Where the value of the farm dwelling (including curtilage and improvements) is 20% or less of the total value of the farm, the farm is a Type 1 farm otherwise it is a Type 2 farm.The Commissioner will accept the following as a reasonable estimate of the value of the farm:

  1. Rateable value - however, the usefulness depends on the circumstances as the value of the dwelling may not be readily available.
  2. Bank valuation or real estate agents appraisal - however, a formal valuation will be appropriate if a farm is on the borderline of both Type 1 and 2.
  3. Cost - if the relative costs are comparable and contemporaneous e.g. the cost of a farm in 1990 and the cost of a new farmhouse in 2010 are not comparable or contemporaneous

The below table summaries the income tax treatment of dwelling expenditure for each type of farm:

Under the changes, Type 2 farms will no longer be able to claim 100% of any loan interest or rates in relation to the farm dwelling and must substantiate the claim for other dwelling expenses for income tax purposes.This will require Type 2 farms to calculate how much of the farm dwelling is used for business purposes (for example on a time and area basis) and claim a proportion of dwelling expenses (loan interest, rates, electricity and repairs) on that basis.Type 2 farms operating in a partnership or sole trader structure will be able to claim GST on farm dwelling rates, electricity and dwelling repairs to the extent of this same percentage.For companies the rules remain unchanged for dwelling repairs and maintenance expenditure ie there is no GST claim. For example, if, based on an area and use basis, a Type 2 farmer (in a partnership structure) uses 10% of the dwelling for business purposes (i.e. a home office), then for GST purposes they would claim 10% of repairs and maintenance, electricity and dwelling rates.

Larger farms (Type 1) will still be able to claim 100% of loan interest & rates.However, for other dwelling expenses only 20% can be claimed for income tax and GST purposes, unless a larger claim can be substantiated.This could be done by using the same approach for Type 2 farms in determining the percentage of the dwelling used for business purposes. Again, there is no change for a company’s dwelling repairs and maintenance expenditure for GST purposes, ie there is no GST claim.

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