Determination DET 05/03 Standard-Cost Household Service for Boarding Service Providers - change to fixed standard-cost formula to reflect the removal of depreciation on buildings

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The current fixed standard-cost formula for calculating the notional costs of using a domestic dwelling for a home based boarding service activity allows 5% of the purchase price to represent the expenditure normally incurred in owning a domestic property.

There have been changes to depreciation on buildings since the issue of DET 05/03 that impact on the fixed standard-cost component for use of a domestic dwelling. Tax Information Bulletin Vol 22, No 7 (August 2010), provided comment on the changes to building depreciation enacted in the Taxation (Budget Measures) Act 2010. The changes were intended to make New Zealand's tax rules more neutral by recognising that allowing depreciation on long-lived buildings provides tax depreciation rates in excess of true economic depreciation rates. The depreciation rate of buildings (including domestic dwellings) with long estimated useful lives of 50 years or more, has been changed to 0%, with effect to the 2012 income year (for most taxpayers this will apply from 1 April 2011).

DET 05/03 provides for depreciation as a notional cost as a component of the fixed standard-cost in applying a domestic dwelling to a home based boarding service activity. As a consequence of the May 2010 Budget change it is no longer appropriate to provide for depreciation on buildings in the standard-costs.

With the removal of depreciation on buildings in Budget 2010, some adjustment is required to the fixed standard-cost. The adjustment should have regard to increased property ownership costs that include maintenance of the land and related service costs. As the fixed cost amount is 5% of the purchase price of the property which includes the cost of land and improvements, the effect of removal of the depreciation element is a reduction to 4%.

The fixed cost percentage of the purchase price of the property used to calculate the ownership costs is reduced from 5% to 4% to reflect the change for depreciation on buildings.

This change has effect from 1 April 2011 and applies to the 2012 and subsequent income years.