Have a yacht, bach, or apartment caught in the tax net?

Date: 21 August 2013

Expect big changes around claiming a tax deduction for a yacht,  plane, launch, apartment, or bach where there is a mix of business and private use.

According to IRD a tax deduction, under the old rules, is not considered equitable, given that an asset is used both for income earning and private purposes, when indeed,  the principal purpose of acquisition may well have been private (IRD new policy).

Accounting for mixed use assets is now heavy in compliance work for both GST and income taxes.  Ongoing calculations and adjustments are required on an annual basis until the asset is resold.

The new rules apply from 1 April 2011.

The new rules aim to achieve as much "first instance" accuracy as possible by requiring the taxpayer to make fair and reasonable estimates on the intended taxable and non-taxable uses of acquired goods and services.  

How does this impact, say a bach?

Because mixed-use assets combine both private and income earning use in a single asset,  difficult questions arise for the IRD about the appropriate portion of expenditure that will be deductible.

The easiest way to explain this is to divide expenditure into "daily amounts".  If a bach is used by its owners for 40 days in a year,  and rented out for 25 days in that year,  it is clear that:

  • 40 days' worth of expenditure is not deductible.
  • 25 days' worth of expenditure is deductible.

What is not clear is what happens to the expenditure which relates to the 300 days of the year when the asset is not used at all.  Under the previous rules,  the 300 days when the asset is "available for income-earning use",  also gave rise to deductions.  This means the owner would claim deductions for expenditure relating to 325 days,  or 89% (325/365) of total expenditure.

This was not considered an equitable outcome,  given that the asset was used both for income earning and private purposes,  and indeed,   the principal purpose of acquisition may well have been private.

These amendments apply to real property used for short-term accommodation and to boats and aircraft that cost more than $50,000 - collectively called mixed-use assets.  They establish an apportionment method to determine the deductibility of expenditure associated with them.  The proportion of expenditure that is now deductible is calculated by dividing the number of days in which the asset was actually used to earn income by the total number of days the asset was actually used (for both purposes). 

In the illustration above,  this would mean the owner would now be able to claim 38.5% of expenditure (25 days of income earning/65 days of total use).

This is the key rule in these amendments, for this example;

Old rules claim = 89% 
New rules claim = 38.5%

Get the point? Call me if you want to talk about options.  Cheers Peter T.

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