10 July 2006


Proposed changes to tax rules for Boarders

Inland Revenue has proposed some changes to the way that tax is applied to people who get income from hosting boarders in their homes.

The changes will mean that tax obligations would be based on the amount of money received, not how many boarders in a household.

How does it work now?

Currently, people are not required to declare the money they earn to Inland Revenue if they have only one paying boarder If they have two to four boarders, 20% of payments received will be taxed, and if they have more than four boarders,
then they need to keep all their records and declare their income as if they were running a business.

What’s the proposed change?

Tax obligations for people hosting boarders would be based on the amount of income received,
not the number of boarders people have.
Also, rather than keeping all the receipts and records of expenses for the costs of hosting boarders,
people will be able to use the standard costs from Inland Revenue.

These are ‘off-the-peg’ amounts covering all types of expenses such as groceries, energy bills, transport,
wear and tear on the home, and the capital cost of the home.

This makes working out whether any income must be declared for tax is easy.
The right level of standard costs (or actual expenses) is deducted from income.
If there is a difference, that should be declared for tax purposes.

Why are you proposing this change?

The current practice of basing tax obligations on the number of boarders is out of step with general tax principles
where tax obligations are based on income.
The change should also mean fewer people with boarders will have to file tax returns.
This fits with Inland Revenue’s desire to reduce the numbers of people having to file tax returns wherever possible.

Who is affected?

All people who host paying boarders in their home should all be aware of the proposal.

People who have been filing tax returns will notice that it is now easier to claim expenses and work out
whether they owe tax because they have the standard costs to help them.

People who have not been filing tax returns, should look at what income they get from boarders and
deduct the right level of standard costs (or their actual expenses).
If there is a difference, that should be declared for tax purposes.

We expect fewer people will be required to file a tax return under the proposed rules.
These will be people who are making a substantial profit from their boarders, after expenses.
It is not expected that people with one boarder will have to file a return,
unless they are charging well over the average rate.

The standard cost method

The standard cost method uses an average price for basics such as the cost of food, heating, power and transport.
The amount is an average across the country and will be inflation-adjusted annually.

If your income is not greater than the standard cost you will not have to file a tax return or pay tax.

If you have one or two boarders the standard cost is $200 a week for each boarder.

If you have three or more boarders the standard cost for the first two is $200 each and then $162 for each subsequent boarder.
The rate is lower for three or more boarders because costs are less in a larger household

Will these ‘standard costs’ be compulsory?

The standard costs are there to help people work out their tax.
They will not be compulsory.
If you have a paying boarder living with you, and you believe that you spend more on expenses that Inland Revenue
has allowed for in its costs, then you can still keep your records and claim expenses in the same way
– the same applies where you want to claim a loss.

How much income can you earn before you have to declare it?

This will vary because everyone’s situations and expenses are different.
You can review some examples here or view the consultation draft that we have issued which contains several examples of living situations.

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