The Government is 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). These rules will apply from 1 April 2013 for most forms of ownership (i.e. personal, trusts, partnerships and ‘close companies’ – companies controlled by 5 or fewer persons).
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 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.
“Income Earning Expenditure” remains fully deductible as it relates solely to the use of the asset to derive income and has no private element (e.g. advertising expenditure).
“Deductible Apportioned Expenditure” is calculated as:
(“Total Expenditure” – “Income Earning Expenditure” – “Purely Private Expenditure”) X “Income Earning Days”/(“Income Earning Days” + “Private Use Days”)
So if a bach is rented out for 20 days and used by its owners for 20 days, then only 50% of the Apportioned Expenditures will be deductible. (e.g. 50% of Repairs and Maintenance, Rates, Insurance, and Mortgage Interest).
If the mixed use asset is owned by an entity and its debt is equal to or less than the value of the asset, that entities Interest Expense becomes subject to the apportionment rules for mixed use assets.
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
There is no change to the tax treatment where an asset is used for private purposes – no deductions are available for that private use.
Where “Apportioned Expenditure” exceeds the income for the year, the difference is “Excess Expenditure”.
Quarantining of “Excess Expenditure”
Excess Expenditure is normally quarantined meaning it cannot be offset against other income (e.g. salary). However quarantining of “Excess Expenditure” only occurs where 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. “Excess Expenditure” that is quarantined can be carried forward and offset against any future income earned from the asset.
Mixed Use Assets 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.
Changes are being made to the GST Act to make it consistent with the Income Tax Act in relation to mixed use assets. This will impact on the apportionment of input tax claimed in the GST Returns.