Do you hold your mixed-use asset in a company? :
If you answered yes your interest deductions may now be limited. The good news is there is an opportunity to act before 1 April 2014 with minimal tax implications.
Interest apportionment rules now apply to mixed-use assets held in a corporate structure. Interest expenditure in a company that owns a mixed-use asset will be apportioned based on the value of the asset and an average of the company’s debt.
The issue is all of the interest bearing debt in a company is taken into account in the apportionment calculation, not just the debt that is related to the mixed-use asset.
Therefore a company’s interest deduction may be limited quite significantly depending on size of its debt portfolio where the company owns a mixed-use asset.
This is not an ideal situation. The Government however is granting a concession to allow a company to move the asset out of the company with no tax cost if the asset is moved out before 1 April 2014.
The concession allows the asset to be transferred out to the shareholders in proportion to their shareholding at the asset’s tax book value which means no depreciation recovery income will be triggered at that time.
The benefit of moving the asset out of the company is that the company will be entitled to full interest deductions for interest bearing debt.
There is a catch however. If the mixed-use asset is transferred at less than market value, a deemed dividend may be triggered unless the company is a qualifying company.
Advice should therefore be sought to determine your options.
What are the mixed-use asset rules?
The mixed-use asset rules are now in place for holiday houses. For boats and planes the rules will apply from 1 April 2014.
The rules are aimed at assets owned by individuals, trusts, Look Through Companies (LTCs) and close companies.
The aim of the rules is to improve fairness among taxpayers by restricting the ability to claim tax deductions on expenses related to assets which are used both privately and for income-earning use and which are unused for a time during the year.
An asset will be subject to these rules if:
- it is used privately by the owner or close relative, and associates; and
- it is used to generate income; and
- there are more than 62 days in the year when the asset is not actively used; and
- the asset costs more than $50,000.
The new rules apportion expenditure incurred in relation to the asset between what is tax deductible and what is not. The apportionment is based on actual income producing days over total days used to produce income and total private days. Private days include the use of the asset by relatives/ associates even when a market rent is paid!
Please contact your Hayes Knight Adviser or alternatively, our specialist tax team:
Phil BarlowTax DirectorT + 64 9 414 5444
Shelley-ann BrinkleySenior Tax Manager
T +64 9 414 5444