Consultant attacks farm tax changes

The IRD wants to rewrite the rules on the tax deductibility.

The Inland Revenue Department appears to be buying a fight with farmers and their tax advisers as it seeks to change a rule that has been in force for more than 50 years.

Polson Higgs tax partner Michael Turner said most would not see an incentive to change something that has worked well for the last 50 years.

"However, the IRD, after prescribing the practice for farmers' farmhouse expenses since the 1960s, has decided in 2016 to rewrite the rules on the tax deductibility of these costs."

The IRD had issued a draft interpretation on how some costs relating to the farmhouse, such as rates, insurance and repairs and maintenance, should now be treated, he said.

The proposals included automatically reducing the percentage of farmhouse costs that are treated as part of a business from 25% to 15%.

When farmhouse costs were in excess of 20% of total farm costs, the farmer would need to establish their own percentage.

The inference was it would be less than 15%, Mr Turner said.

Business people often had offices at home and they could claim a percentage of their house expenses as office costs.

However, farmers typically worked from their house for meetings with professional advisers, working on their budgets, feeding workers or even mixing lamb formula during lambing season.

"A lot happens in the home for farmers. You feed your bank manager at the kitchen table, or talk to them in the lounge. Even workers wanting to go to the loo have to use the bathroom.

"And IRD has also slipped in a change from farmers able to claim 100% of home phone to 50% - talking about having a go at a sector when they are down."

According to the IRD's existing rules, interest and rates are assigned to the farm only and farmers can claim 25% of house expenses as tax-deductible.

Rates would need to be apportioned to the farmhouse if the proposals were adopted.

The change to 15% from 25% was not a significant one regarding money but it was a significant change to a rule that had lasted more than 50 years, Mr Turner said.

"We are not convinced the department's new suggested percentages has any more science behind it than the accepted practice for the last 50 years.

"We are also unconvinced the small amount of revenue that may be raised based on the proposed approach will come close to offsetting the compliance cost of following the new proposed rules."

It had taken the IRD 26 pages to articulate its policy and how it might be applied.

But nowhere in the 26 pages did IRD justify the reduction from 25% to 15%, he said.

"It simply starts from the proposition that the previous policy was a 'concession' negotiated with the farming industry."

Inland Revenue is seeking comments by December 22, with the policy coming into effect in the 2017-18 tax year.

At a glance:

• IRD wants to change the rules on how farmers claim office expenses.

• Phone expenses reduced to 50% from 100%.

• Compliance costs likely to rise Science behind changes questioned.