GRA Blogs

Articles by John Heaslip

John Heaslip

Changes to boarding service rules

2432

Over the years I have had wide-ranging conversations with clients about boarding services and how to qualify. The reason people wish to  qualify as providing a boarding service is if the amount of income you receive falls below either the “weekly standard-cost” threshold or the “annual housing standard-cost” threshold, then the income is exempt from tax, i.e. it does not need to be reported to the IRD. 

From April 1 2019, this threshold was lowered, so it is harder to qualify. 


What is a boarding service?
If you are providing a boarding service, it means you are providing accommodation to boarders, including regular meals and other associated care, activities and benefits that usually or commonly occur in a domestic household. If you are not providing these, then the income becomes rental income and is taxable.

Who can qualify? 
Only individuals can provide boarding services. However, you can qualify for the exemption if the property is owned in a trust.  Note you can only use the annual housing standard-cost exemption noted below for a property held in a trust if the individual incurs all expenditure in relation to the maintenance of the property, including interest on the mortgage, rates, insurance etc.

Boarding Service Rules

There are several ways to work out whether you qualify for the exemption.

1.   Weekly Standard-Cost 
From 1 April 2019, the new weekly standard-cost threshold is $186 per week per boarder.  It applies up to a maximum of four boarders. If you have more than four boarders at any time during the year you do not qualify for the exemption.

If your gross income is less than $186 per week, you can elect to apply the exemption, which means you do not need to pay tax on it and you do not need to calculate expenses. If your income is more than that, you can either treat the excess as taxable or see if you fall below the annual housing standard-cost threshold.

2.   Annual Housing Standard-Cost
An annual housing standard-cost calculation is an approximation of the cost of providing the boarding service using the cost of the dwelling, the number of boarders and period in which you provided the boarding service as a basis for the calculation. 

The formula is as follows: (a – b) x c x d.  In this formula:
•   “a” is 4% of the original cost of the land and buildings (including cost of improvements) if the property is owned, or total rent paid if it is rented. 
•   “b” is the total accommodation supplement (if any) received during the income year.
•   “c” is the number of boarders relative to the number of occupants living in the property expressed as a percentage.
•   “d” is the number of full weeks in the income year during which the boarding services were provided divided by 52.

If the annual income received from boarders is less than the annual standard housing cost amount, then you can treat it as exempt income. There is a worked example below to illustrate.

3.   Income and expenses calculation
As an alternative to using either the $186 standard weekly cost or the annual housing standard cost, you can choose to do an actual calculation of income and expenses. 

Example of Annual Housing Standard-Cost calculation
Three boarders paid $200 per week for 39 weeks = $23,400. Therefore, as the income from boarders is more than $186 per week, you can either (a) treat the excess as taxable or (b) see if you fall below the annual housing standard-cost threshold.

Method (a) = 3 x $186 x 39 = $21,762 - $23,400 = $1,638 of taxable income.

Method (b): Annual Housing Standard-Cost
•   “a” cost of house including improvements = $450,500 x 4% = $18,020
•   “b” total accommodation supplement (from WINZ) = $0
•   “c” number of boarders = 3, and the number of occupants = 5, as a percentage = 60%
•   “d” number of full weeks which the boarding services were provided = 52 divided by 52 = 100%.
($18,020 - $0) x 60% x 100% = $10,812. 

As method (b) is more than the weekly standard cost, then choose (a) above or choose to do an actual calculation of income and expenses. 

Conclusion
The key thing here is you need to be careful in classifying occupants in your house. The IRD are getting increasingly specific on what exactly the provision of boarding services are. The drop in the standard cost from $270 per week for the first two boarders and third and fourth boarder being  $222 each, to $186 per week across up to four boarders, is a significant decrease that may catch out some people.

Please contact us for further information about boarding services by phoning +64 9 522 7955, emailing [email protected] or by filling out the online form.

John Heaslip
signed
John Heaslip
Business Advisory Director
© Gilligan Rowe & Associates LP

Did you like this article? Subscribe to our newsletter to receive tips, updates and useful information to help you protect your assets and grow your net worth. We're expert accountants providing expert advice to clients in NZ and around the world.

Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
Comments

Add a Comment

Log in or sign up to post a comment

Testimonials
We had the good fortune of attending the Property School this year and it was worth every cent of our investment. All the sessions were jam packed with useful information and We thoroughly enjoyed every minute of our time here. Matt, Janet and John all have a different style of teaching yet I'm really impressed with the depth of knowledge each of them possesses. What you will learn here is a combination of theories and practical knowledge that you can take advantage of straightaway and apply in the real world. Give them a call today and book for the next session! - JL & XY - December 2017
We can help
Here's how

GRA logo

Gilligan Rowe and Associates is a chartered accounting firm specialising in property, asset planning, legal structures, taxation and compliance.

We help new, small and medium property investors become long-term successful investors through our education programmes and property portfolio planning advice. With our deep knowledge and experience, we have assisted hundreds of clients build wealth through property investment.

Learn More
GRA Senior Partners
TOP