By Phil Barlow – 4 July 2012

Perhaps the most controversial changes for many Kiwis to come out of the 2012 Budget are those that impact taxpayers’ ability to claim deductions for costs on private assets which can also be used to bring in additional income. These are called mixed-use assets and include the boat, family bach and holiday home as well as private aircraft. Phil Barlow explains.

This idea is not an entirely new idea. Hayes Knight first commented on the changes when they were announced in 2011 and overall we see the change as a good thing. The proposals are necessary to sort out a messy area of the law which is open to wide interpretation and hence confusion, rather than abuse.

If the family bach is rented to a third party on an arm’s length basis, the owner is generally able to apportion the expenses incurred during this time and claim a deduction accordingly. However, the real issue arises when people partly use assets like the family bach themselves but also lease them to others and then unfairly claim deductions for expenses such as
interest, rates and depreciation.

The bach owner is not entitled to claim a deduction for expenses incurred for periods the property is not rented. However, there is a loophole in that some people are able to claim a deduction for expenses incurred during times when the bach is not rented but is “available for rent” simply because the property is not being used for the enjoyment of the owner or their family and friends.

The IRD’s view is that evidence of a house being available for rent should
generally include active and regular marketing of the holiday home at market rates and the availability of the property for periods that demonstrate the holiday home is earning rental income or is generally available to earn rental income.

However, in the absence of a strict policing regime to determine when and if a mixed-use asset is available for private vs. income-earning use, unfairness arises when owners claim their bach is available for rent during significant periods of the year just because the bach is empty. Many believe that claiming these deductions is unfair, particularly if the owner holds the asset primarily for private getaways.

The 2012 Budget proposes to close this loophole by introducing an apportionment approach, whereby deductions for expenses incurred in relation to mixed-use assets will be based on the actual income earned and private use. For example, owners who rent out their family bach for 30 days
in a year and use it themselves for 30 days in a year will be able to claim a deduction of 50% of their general costs, rather than the 90% they can claim now.

The Government expects these changes to save the country around $109 million over the next four years. While this may not seem like a lot in the grand scheme of things, it is still a step closer to achieving a tax system which provides equal treatment to all taxpayers.

Contact your Hayes Knight adviser to discuss how these new rules could impact you. Alternatively please contact Tax Director Phil Barlow:

T: 09 448 3233
E: phil.barlow@hayesknight.co.nz