In the 2012 budget the Government announced that it was seeking to tighten the rules for tax deductions relating to holiday homes, charter yachts and aeroplanes known collectively as mixed use assets (ie there is a portion of private and business use of the asset). The Government has recently sought to clarify their position on the proposed changes.
The proposed changes are aimed at limiting the general deductions that can be claimed on a mixed use asset for the time that the asset is neither rented nor used privately but is available for rent.
It is proposed that from 1 April 2013 expenses that are not directly attributable to either private use or taxable use will be required to be apportioned. The most common example will be holiday homes that are rented occasionally, though all mixed use assets are caught by the proposed rule change.
The portion of general costs which will be deductible will be calculated as “time used to earn income” divided by “total time used”.
So if a bach is rented out for 20 days and used by its owners for 20 days, then 50% of the apportioned general costs will be deductible.
The suggestion is an asset will come within these new rules if:
- It is rented on a short-term basis
- It is used privately and to earn income
- It is unused for at least 62 days a year
- It’s cost is $50,000 or more
Note: there is no change to the existing tax rules during the period a mixed use asset is rented. Expenditure incurred during the rental period remains fully deductible as is the case now. Similarly there is no change to the tax treatment when the mixed use asset is used privately where no deduction is available.
Ring fencing losses
Under the government’s proposals some losses from mixed use assets will be ring-fenced meaning they cannot be offset against other income (e.g. salary). Ring fencing of losses calculated under the new rules will occur if the gross income derived from the asset in a year does not exceed 2% of the cost of the asset or rateable value if land. Losses that are ring-fenced can be carried forward and offset against any future income earned from the asset.
Mixed Use Asset Opt Out
The proposals allow the owners of mixed use assets to opt out of the rules if the gross income generated from the asset is less than $1,000, or if the asset produces a net loss. Opting out will make the income exempt and any expenses non-deductible.