Proposed Changes to Tax Deductibility of Farmhouse Expenses

IRD are currently reviewing the laws around tax deductibility of farmhouse expenses. Since the 1960s, farmers and orchardists have been able to deduct 25% of farmhouse expenses without  needing to provide evidence of their business use. They have also been able to deduct 100% of rates bills and interest costs on loans. 

Under the proposals, farmers will be grouped into two sections – Type 1 farmers and Type 2 farmers. 

Type 1 farm businesses will be where the cost of the farmhouse (including the curtilage around the house) is 20% or less of the total cost of the farm. 

Type 2 farm businesses will be where the cost of the farmhouse (including the curtilage around the house) is more than 20% of the total cost of the farm. 

Type 1 Farmers

Type 1 farmers will still be able to deduct 100% of loan interest even if there is a house purchased with the farm – this is currently the same rules we use now. All other costs will be subject to a 15% deduction (down from the current 25% deduction). 

There is a proposal that rates bills need to be apportioned between the farm and the house and then only 15% of the rates that apply to the house can be claimed. We are pretty sure however that IRD will change their mind on this as it does seem a  bit over the top for the calculations that need to be done to arrive at this number. 

Type 2 Farmers

Type 2 Farmers will have to apportion all costs (including interest on loans) based on a normal “use of home as office” calculation – i.e. you need to measure the area of the office divided by the area of the house. This particular classification is designed to capture “lifestyle” farmers who have been able to claim house expense deductions as if they were “real” farmers. 

There are probably two areas of these proposals which are of most concern: 

15% Deduction Rate

The 15% deduction does seem to be  a bit arbitrary – something that IRD has decided “feels about right” when they compare the claims that town businesses can make with what farmers can make. 

How is value determined for the purposes of deciding Type 1 vs Type 2

For most dairy farms this is probably not an issue – however it could be a big issue with kiwifruit orchards. The proposal suggests that original cost price can be used or a “formal valuation or a reasonable estimate of the values of the farmhouse and farm”.  With the volatile values we have been experiencing in kiwifruit properties over the last six years in particular, this could be a big issue. 

So what is happening about these proposals

Chartered Accountants Australia and New Zealand (CAANZ) and Federated Farmers will each be putting in a comprehensive submission on both of these points. Both of these organisations have been talking together and are on the same page. Most people agree that a differentiation is needed between “lifestyle” farmers and “real” farmers. It doesn’t seem fair that a lifestyle farmer gets a deduction for 25% of their house costs when the house is not an integral part of their farming business. 

The two points noted above will be the main topics of discussion in the submissions made by these groups. IRD are open to submissions which help them understand how farmers and orchardists use their houses in their businesses. 

If you are interested in learning more about this, the Discussion document can be found here: Submissions close on 22 December 2016. 

The other action you could take is to discuss this topic with your local Federated Farmers representative as they are no doubt aware of what is happening.