1 DECEMBER 2005

NEW ZEALAND GAZETTE, No. 202

5117

(b) A boarding service provider elects to use the standard-cost basis by treating income from private boarding services as
exempt income, either in a tax return or by electing not to file a tax return, up to but not exceeding the sum of standard-cost
set in this determination, for the relevant income year.

(c) The boarding service provider in any one income year, must adopt either the standard-cost basis or the actual-cost basis.

(d) In electing to use the actual-cost basis, a boarding service provider must keep sufficient records to support their tax position.

Income Tax Implications and Filing of Tax Returns

The following income tax implications apply to a boarding service provider who provides a private boarding service and elects
to use the standard-cost basis set out in the determination.

(a) Section DA 2 (3) of the Income Tax Act 2004 prohibits any actual tax losses above the level of the standard-cost from
being utilised against other income for any income year or carried forward to future income years.

(b) In accordance with section CW 49 of the Income Tax Act 2004, a boarding service provider would not be required to file
a tax return for that income year if:

(i) after applying the amount of standard-cost under the determination, and treating boarding income up to that level as
exempt, the boarding service provider has zero income tax liability; and

(ii) the boarding service provider does not have any other income where tax has not been deducted at source.

Standard-cost Election

Form of Election

A boarding service provider may elect to use the standard-cost basis in calculating their income for an income year. An
election is merely a decision to use either the standard-cost basis or actual-cost basis for calculating assessable income, if any,
for an income year. An election does not require notice to be given to Inland Revenue of which method is used to calculate
a boarding service provider’s income for an income year.

Timing of Election

It is envisaged that many boarding service providers will make their election to use either the standard-cost or actual-cost basis
at the beginning of an income year, as those who decide to use the actual-cost basis should prepare themselves to keep
adequate records to support expenditure claimed at the end of the income year when filing a return. An election can be made
at any time prior to filing a return. Should boarding service providers not provide a return of income by the due date for filing,
it will be assumed they have elected to use the standard-cost option.

Consumers Price Index

To assist boarding service providers, Inland Revenue will publish the effect of the annual movement of the All Groups
Consumers Price Index, as at the end of March each year, on the weekly standard-cost per boarder. The revised
standard-cost component will be published in the New Zealand Gazette and in Inland Revenue’s Tax Information Bulletin. This
determination uses information current as at March 2005.

The changes in the annual movement of the All Groups Consumers Price Index will not be applied to the annual capital
standard-cost. This is because the basis for this component is either historical (where a boarding service provider owns their
domestic accommodation) or market-related (where a boarding service provider rents their domestic accommodation).

An annual adjustment will be made as at March 2006 to the weekly standard-cost per boarder applicable for the 2007
income year.

Goods and Services Tax (G.S.T.)

As private boarding services are an exempt activity for G.S.T. purposes, boarding service providers will not be eligible
to register for G.S.T. for this activity or claim back G.S.T. charged on goods and services consumed. Accordingly, the
standard-cost components determined by the commissioner have been prepared on a G.S.T.-inclusive basis.

Purchase Price of Domestic Accommodation

The purchase price of a domestic accommodation will include any subsequent cost of capital improvement such as building an
extension, but does not include the cost of general repairs and maintenance. Boarding service providers will be required to
provide verification of capital improvements. The cost of improvements should be supported by receipts but may also be
evidenced by local authority building consent applications detailing related costs, if applicable.

Current tax law allows deductions for expenditure to the extent such expenditure is incurred. Accordingly, boarding service
providers are only permitted to use the purchase price and cost of capital improvements to a property; you cannot use current
market or local body rateable values for the annual capital-cost calculation.

Family Trusts

Where a domestic property is in a family trust occupied by the beneficiaries who provide boarding services, they may only
calculate the standard-cost for the annual capital component based on any rent paid. Any rent claimed will be proportional
to the period of boarding services provided and further limited to the proportion of boarders compared to the average number
of household occupants. The rent claim will be calculated as follows:

Rent claimable = \frac{annual rent paid}{1} \times \frac{service period}{52 weeks} \times \frac{number of boarders}{average household number}

International Students and the Code of Practice

Inland Revenue has used the code of practice for the Pastoral Care of International Students as the standard to ensure a sizable
group of service providers are not denied the compliance cost reduction opportunities available under the standard-cost option.

Where five or more international students are accommodated as boarders, the domestic accommodation is a boarding
establishment for the purposes and relevant standards of code of practice. The domestic accommodation may be viewed by
Inland Revenue as a commercial dwelling.

For example, a building required to be registered with local authorities under section 636 of the Local Government Act 1974 as
a residential institution will be considered a commercial dwelling by Inland Revenue.