In late May 2018, IRD released a Questions We've Been Asked document QB 18/09: "Income tax - can sharemilkers and contract milkers deduct farmhouse expenditure using the approach in IS 17/02?" clarifying whether or not sharemilkers and contract milkers can claim farmhouse expenditure using the same approach as some other farming businesses.
Interpretation statement IS 17/02: "Deductibility of farmhouse expenses" sets out the Commissioner's updated view on the appropriate treatment of farmhouse expenses. In the statement the Commissioner considers that the general rules of deductibility and apportionment should apply to farmhouse expenditure however, notes that in many situations, the compliance cost of calculating the correct business portion will outweigh any likely deduction. The Commissioner has therefore separated farming businesses into either Type 1 or Type 2 farms with separate levels of generally acceptable farmhouse deductions for each. The distinction and related rules apply from the beginning of the taxpayers' 2018 financial year.
Type 1 farms are distinguished as farming businesses where the value of the farmhouse is 20% or less of the total value of the farm and are allowed an automatic 20% deduction for farmhouse expenses and a 100% deduction for rates and interest. Also, a 50% deduction is allowed for fixed line telephone charges unless the taxpayer can show that 50% is too low.
Conversely, Type 2 farms are distinguished as farming businesses where the value of the farmhouse is more than 20% of the total value of the farm and are required to dissect expenses where possible then apportion the expenses between business and private, using a fair and reasonable basis. The 50% deduction for fixed line telephone rental (as mentioned above) also applies to Type 2 farms.
The Commissioner's position is that sharemilkers and contract milkers can use the approach as outlined in IS 17/02 as long as they carry on a sharemilking or contract-milking business as sole traders or a partnership independent from the farm owner's business and the business is of sufficient scale to warrant its own home office.
If you believe that the above may have implications on your business and you would like further advice, please contact us.