A new way to calculate your home office costs

Inland Revenue has recently published guidance on how to apply the ‘square metre rate’ option for calculating home office expenses, available to business owners who use some of their own home to run their business. Until the 2017/18 income year taxpayers had to apportion every expense relating to the home premises between business and private portions. The square metre rate option was introduced in 2017, and Inland Revenue has now published guidance on how to use it. Operational Statement OS 19/03 (Statement) applies from 4 July 2019, its date of publication. 

If taxpayers want to use this option, they will not have to:

• Keep detailed records of utility costs (electricity, gas, insurance, phone, mobile and internet charges).

• Apportion these costs between business and private use of the residence. 

They will still have to apportion costs related directly to the premises – interest on the mortgage, rates and rent. 

Whether or not the square metre rate option is worthwhile is something every taxpayer will have to work out themselves – it does save time, but it might result in a lower deduction. Taxpayers might decide it is worth taking the extra time to get a bigger deduction, but ultimately will have to do the calculation both ways for at least one year to work out which is best. 

The square metre rate deduction is very simple to calculate, by following these steps:

1. Calculate the area of the premises used primarily for business purposes.
2. Multiply that by the square metre rate set by the Government. The square metre rate for the 2018/19 income year is $41.70.
3. Calculate the actual premises costs (e.g. mortgage interest, rates and rent), and then apportion that between the business and private use.
4. The sum is the total deduction available to the taxpayer for their home office costs. 

The statement gives further guidance on each step, and this guidance is discussed below.

Taxpayers should also note that:

• If a taxpayer uses the square metre rate they cannot deduct costs relating to anything other than the utilities costs that are included in the square metre rate, and premises costs (e.g. depreciation wouldn’t be deductible). 
• Use of the square metre rate is optional

Identify the business part of the premises

These areas have to be separately identifiable parts of the buildings on the premises used primarily for business purposes: 

• separately identifiable parts of the buildings on the premises: it has to be obvious, to a reasonable, objective person, that the particular area is identifiable as being used separately for the business. It would be easier to identify an area as being used for business purposes if it has a business asset in it, such as a computer, business records, or inventory. 

• used primarily for business purposes: the area doesn’t have to be used 100% for business purposes, but should be used mainly for that purpose. More than 50% use would be acceptable. 

Examples of separately identifiable areas include a home office used primarily for business purposes, or a garage used to store business inventory.

Square metre rate

The square metre rate will be published annually. The square metre rate for the 2017 – 2018 income year was $41.10 per square metre. The square metre rate for the 2018 – 2019 income year is $41.70 per square metre.

Premises cost deduction

The premises cost deduction still has to be calculated using actual expenses, which are apportioned between business and private use. First, the taxpayer has to calculate the business proportion by dividing the total area of all buildings on the taxpayer’s premises by the business square metres they have already calculated. 

Final deduction

The total final deduction is the sum of the square metre rate deduction plus the premises cost deduction. 

Whether this is a reasonable deduction will depend on the actual costs that the business would have been able to deduct if they had completed the full calculation based on actual costs, and the time required to do that calculation. The Statement notes that the square metre rate is determined using information obtained from Statistics New Zealand, to calculate the “national average, annual cost of utilities for the average sized New Zealand household.” Premises related costs such as mortgage interest rates and rent are excluded from this calculation as they are considered too variable across New Zealand. 

Please contact your usual Deloitte advisor if you need assistance in considering this calculation or any other issues related to a business use of your home premises.

August 2019 Tax Alert contents

• Updating a PIR and (further) KiwiSaver changes
• Does travel to work come with a tax bill? 
• Have your say on vacant land tax
• Tweaks and realignments in the latest tax bill
• Snapshot of recent developments