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NEW ZEALAND GAZETTE, No. 202

1 DECEMBER 2005

The standard-cost which the taxpayer may treat as incurred in deriving exempt income for the purposes of section CW 49 of the Income Tax Act 2004 consists of two elements:

• the weekly standard-cost per boarder; and
• the annual capital standard-cost.

It is expected, however, that many boarding service providers will be able to determine their tax position by referring to the weekly standard-cost and will not need to additionally calculate the annual capital standard-cost.

(a) Weekly standard-cost per boarder

The weekly standard-cost per boarder represents the direct cost of providing private boarding services to each boarder on a weekly basis.

This component covers expenditure on items and services typically provided to boarders, such as food, laundry, cleaning, heating, power, transport, telephone rental, use of bedroom chattels, general household furniture, linen and incidentals.

Where a taxpayer elects to use this method and the weekly payments for the relevant number of boarders in any week do not exceed the standard-cost amount, the income is exempt.

(b) Annual capital standard-cost

The annual capital standard-cost element represents the cost for the use of the domestic accommodation in providing the private boarding service and includes financing and depreciation costs. This is an annual calculation for the use of the domestic accommodation, based on:

• the actual cost to the boarding service provider of acquiring and making capital improvements to the domestic accommodation or renting the domestic accommodation in which the boarding services are provided;
• the proportion of boarders who reside in the accommodation in relation to the overall average number of occupants; and
• the proportion of the actual period during which private boarding services are provided in an income year.

The calculation depends on whether a boarding service provider owns or rents their domestic accommodation. Additionally, the annual capital cost calculated must be reduced by the amount of any accommodation supplement received by a boarding service provider.

(i) Boarding service provider who owns their domestic accommodation

Where a boarding service provider owns their domestic accommodation, the annual capital standard-cost for any income year must be determined in accordance with the following formula:

[(a x 5%) – b] x c x d

where:

a is the purchase price of the domestic accommodation plus the cost of all capital additions; and

b is the annualised amount of accommodation supplement received by the boarding service provider (weekly amount received multiplied by 52 weeks); and

5% represents the typical expenditure incurred in owning a domestic property, including depreciation of the building and outgoings such as rates, insurance, mortgage interest cost, repairs and maintenance; and

c is the average percentage of boarders in relation to the overall average number of occupants living in the domestic accommodation during the income year; and

d is the number of full weeks during which private boarding services were provided in an income year, divided by 52.

(ii) Boarding service provider who rents their domestic accommodation

Where the boarding service provider rents their domestic accommodation, the annual capital standard-cost for any income year must be determined in accordance with the following formula:

(a – b) x c x d

where:

a is the annualised rental payment (weekly rent paid x 52 weeks); and

b is the annualised amount of accommodation supplement received by the boarding service provider (weekly amount received x 52 weeks); and

c is the average percentage of boarders in relation to the overall average number of occupants living in the domestic accommodation during the income year; and

d is the number of full weeks during which private boarding services were provided in an income year, divided by 52.

The standard-cost for boarding service providers is calculated inclusive of G.S.T., if any.

This determination is made by me, acting under delegated authority from the Commissioner of Inland Revenue.

This determination is signed on the 14th day of November 2005.

GRAHAM TUBB, National Manager, Technical Standards.

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COMMENTARY ON DETERMINATION DET 05/03

This commentary and its appendices do not form part of the determination. They are intended to provide assistance in the understanding and application of the determination.

This determination and this commentary also appear in Tax Information Bulletin, Vol. 17, No. 10 (December 2005).

Standard-cost Basis and Actual-cost Basis

(a) In accordance with section 91AA (3) of the Tax Administration Act 1994, a boarding service provider may use the standard-cost basis to calculate their income tax liability for the elected income year.