Be aware of rules when calculating rent

On-farm accommodation is often offered to farm employees, with the advantages of no travel time or costs to get to work, but of course, employers must charge rent.

Traditionally, farmer employers have charged moderate rents to reduce the extra tax the employee must pay.

However, in November 2016, a statement from the Inland Revenue Commissioner confirmed that the amount of rent to be charged is determined by ‘‘the market rental value of the accommodation if it was available on an arm’s length basis’’.

That’s pretty much the price that a willing landlord would accept from a willing tenant.

Inland Revenue no longer accepts any reasons farmers have traditionally used for charging moderate rents – the contractual or employment related matters have no effect on the dwelling’s market rental value.

This causes a few issues for farmers with accommodation in desirable locations.

A three-bedroom house and garage with a few acres in the country near New Plymouth might fetch up to $600 from rural lifestyle-seeking punters.

No farm employee is likely to want to pay that much in rent. And if the employee would be happy with a one-bedroom cabin why should they have to pay $600 for a mansion? That seemed a fair justification to adjust rents down in the past. No more.

And Inland Revenue says it’s not relevant, when estimating market value, that there is no ‘arm’s length’ market when the farm dwelling is only available to family and live-in employees.

This is tricky for farmers with houses in desirable locations, as it makes it harder to find live-in employees due to high rentals.

While they can increase the employee’s salary to achieve the same take home pay to compensate for a higher rental, this higher income has significant consequences for the employee impacting on eligibility for Working for Families tax credits, student allowance eligibility, student loan repayments and child support obligations.

Inland Revenue does provide some options for mitigating high market value rentals.

For instance, rent can be discounted in cases where part of the accommodation is used for business, something the farmer can structure into the employment contract.

Where employees share the accommodation, then the rental can be apportioned.

There are a few other ways to reduce market value including renting just the house to the employee, minus the few acres and perhaps the farm sheds that come with it.

Another option, which is often the case anyway, is to supply the house to the employee under a service tenancy linking the house to the employment relationship and the 90-day notice period is reduced to 14 days.

The reduction in tenant rights will reduce the market value.

As for how farmers go about determining market value or how often to update the valuations, it’s up to them to do so using whatever means, ranging from a registered valuer to a real estate agent or online research of comparable properties, and of course having the documentation on hand to support the rent charged.

❚ BDO Taranaki specialises in rural business advisory services and its team of rural experts write a monthly column on financial issues affecting farmers. BDO Taranaki is an independent member of the BDO NZ accounting network. Principal Mark Irving heads the dairy section of BDO’s Agribusiness Sector Group.