Crowe Horwath: New rules in place for farmhouses

Farmhouse rules are changing. Photo / 123RF

For quite some time, farming operations have enjoyed the 25 per cent farmhouse expenditure regime.

This has now been updated from the start of the 2017/2018 tax year (July 1 for June balance dates and April 1 for March). This means you need to change your accounting system to bring your claim into line with the new legislation.

The new rules depend on specific farming situations, the first step to work out if you are a "Type 1" or "Type 2" farm.

Type 1 Farm: A farming business where the value of the farmhouse is 20 per cent or less of the total value of the farm.

Type 2 Farm: A farming business where the value of the farmhouse is more than 20 per cent of the total value of the farm.

When calculating the values of the farm, you can either use cost or a reasonable estimate of market value.

Once the value has been established farmhouse expenditure deductions are then determined:

Type 1 Farm Rules:
* 100 per cent deduction for rates (no change).
* 100 per cent deduction for interest expenses related to the purchase of the farm (no change).
* 50 per cent of telephone rental charges, unless you can substantiate a higher percentage.
* 20 per cent deduction (previously 25 per cent) for all other farmhouse costs like electricity, insurance and house repairs.

Type 2 Farm Rules:
* 50 per cent of telephone rental charges, unless you can substantiate a higher percentage.
* Rates and interest expense (related to purchase of the farm), apportion based on a fair and reasonable basis — the value of productive farm land and improvements as a percentage of the total property value, or a small claim based on a home office percentage would be reasonable.
* Other farmhouse costs, as above apportion on a fair and reasonable basis — home office calculation.

The complexity of the rules increase for the appropriate GST claim. We suggest you contact your advisor to discuss your specific situation if you are unsure.

The changes affect every farming business. There is no hiding from this law change. Some farmers in the Type 1 category will choose to wear the reduction from 25 per cent to 20 per cent, as substantiating a higher claim is too hard. For those claiming a higher deduction, record keeping and supporting documentation is key.

For Type 2 farms, your advisor will need to know the office use area and house area and any other parts of the dwelling used for business to calculate the percentage use.

The important part is getting this deduction correct for this current financial year, otherwise your GST will be incorrect and require adjustments. If you would like further clarification to help with your calculation and or updating your accounting system please contact us.

This information is general and readers should seek specialist advice before making financial decisions.