Tax on the Beach House – Mixed Use Assets Explained

Tax on the Beach House – Mixed Use Assets Explained

Changes to Tax Treatment for Beach Houses, Boats and Aeroplanes

We have had a number of enquiries around the proposed changes announced in Budget 2012 regarding beach houses and we thought we should give everyone a quick update. The proposed changes applies equally to boats or aeroplanes.

The IRD have indicated that they want to clarify just what can be deducted on beach houses, boats or aeroplanes that are rented out for parts of the year. They call these ‘mixed use’ assets.

The current agreed position is as long as the beach house is available for income-earning use, and the owner makes reasonable attempts to attract tenants, the owner can claim deductions for all periods of the year (except when the asset is actually being used by the owner).

The IRD have used the following example which we think is useful to illustrate the issues. It refers to a beach house but would apply equally to other assets.

A  holiday home is used by the owners for five weeks of the year and rented out for five weeks of the year. The owner incurred expenditure which relates to:

a) the rental use of the holiday home;

b) the private use of the holiday home; and

c) the 42 weeks of the year where the holiday home was not in use.

Using the above example, it is absolutely clear in law is that the owner may claim deductions for expenditure which solely relates to the five weeks of the year that the holiday home was rented. These deductions relate specifically to deriving income. In the case of holiday homes, depreciation can no longer be deducted but it would apply to other ‘mixed-use’ assets.

It is equally clear that deductions cannot be claimed for expenditure which relates solely to the five weeks of the year when the holiday home was occupied by the owner. (There is a section of the Income Tax Act that prevents deductions for periods of private use),

So in talking about changing the rules around ‘mixed-use assets’, the  IRD is concerned about what extent the owner should be able to claim deductions which relate to the 42 weeks of the year the holiday home was empty. A similar question arises for expenditure that is not directly related to any time period.

There has been quite a bit of consultation in the time that has passed since the first announcement and a couple of options have been explored.

As a result of the consultation process, the IRD has recommended the Apportionment Approach. In a nutshell, this would require some new legislation that:

  • requires mixed-use asset owners to apportion their tax deductions based on their actual income-earning and private use of the asset.
  • allows owners who derive small amounts of income from the asset to treat that income as exempt (probably $1000 gross or less).
  • would mean that those with gross income from the asset of less than 2% of its cost (or rateable value if land-based assets) will be required to apportion their deductions. However, if a loss results, that loss will only be able to be carried forward and offset against future profits from that asset. These losses are essentially ‘ring fenced’.

For those who are registered for GST, there are some additional implications.

The IRD argues that the proposed approach will apportion tax deductions of owners in an equitable manner. Their deductions would reflect the amount of private and income-earning use of their assets. The IRD argue that this approach also deals with compliance cost concerns by allowing those with gross revenue of less than $1,000 to treat the income as exempt. We beg to differ on this point as $1000 is not a large sum.

So where to from here? We’ll keep you posted. The proposal will require legislation which has yet to be introduced so for now, it’s business as usual. If you would like any specific advice on your own situation, give us a call to discuss.

The information on this website should not be used in any actual transaction without the advice and guidance of a professional Tax Adviser who is familiar with all the relevant facts. Although the information contained here is presented in good faith and believed to be correct, it is general in nature and is not intended as tax advice. Furthermore, the information contained herein may not be applicable to or suitable for the individuals’ specific circumstances or needs and may require consideration of other matters.

Angus is the CEO and founder of Generate Accounting.