On 17 October 2016 Inland Revenue released draft interpretation statement QWB00082 Income Tax – deductibility of farmhouse expenses. This draft interpretation statement proposes to change how farm dwelling expenses are claimed for income tax purposes.
Under Inland Revenue’s current view of the law, full-time 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 (special rules can apply to companies and trusts) an income tax deduction equal to 25% of expenditure incurred in relation to the farm dwelling, for example, electricity and dwelling repairs.
Under proposed changes, farmers would be classified into Type 1 (essentially larger farms) and Type 2 farms (essentially smaller farms). Where the cost of the farm dwelling (including curtilage and improvements) is 20% or less of the total cost of the farm, the farm is a Type 1 farm otherwise it is a Type 2 farm.
Under the proposed 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. 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.
Larger farms (Type 1) would still be able to claim 100% of loan interest. However, for other dwelling expenses only 15% could be claimed for income tax 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.
The table below summaries the proposed income tax treatment of each type of farm:
These proposed changes will affect every farmer and are likely to result in farmers paying slightly more tax.
The deadline for submissions to these proposals was 23 December 2016.
We have been in discussion with Inland Revenue subsequent to this deadline. Our impression is that the final changes could be more tax payer friendly than those outlined above.