Changes to boarding service rules
2432POSTED:
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.
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.
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