Mixed Use Assets - New Rules
Grange Associates Ltd - 6 September 2013
As part of the 2011 Budget, the Government signalled that it would be
looking closely at the way taxpayers were claiming deductions for expenditure relating to assets that are
used for both income earning purposes and personal enjoyment (so called ’mixed use assets’), such as holiday
homes, yachts and aircraft. As a result of this, new rules surrounding these assets were enacted into
law on 17 July 2013 as part of the Taxation (Livestock Valuation, Assets Expenditure and Remedial Matters)
Act.
These new rules come into effect:
- From the 2013-14 tax year for holiday
homes
- From the 2014-15 tax year for boats and aircraft
What is a Mixed Use
Asset?
A mixed use asset is used for both private and income-earning use and is also unused for 62 days or more during
a tax year.
The rules apply to any land and buildings that meet the above criteria, regardless of cost price or current
value;
For boats and aircraft, the asset must have had a cost price or market value of $50,000 or more when you bought
it.
It also applies to any additional item or accessory relating to the asset, for example a quad bike stored at a
holiday home.
What assets are excluded?
The rules do not apply to:
- Residential rental property used for long-term rental;
- Business assets where private use is minor;
- Home office, where your expense claim is based on floor area
Opt Out Provisions
If your income from a mixed use asset is less than $4,000 for a tax year or you have quarantined expenditure
(see discussion below) you can choose to treat mixed use asset income as exempt income for that tax year, thus any
income or expenses relating to your asset won’t be included in your income tax return.
The decision to opt out has to be made each year and can change from year to year. Sufficient records would
still need to be maintained to justify the decision to opt out.
The opt out provisions do not apply to companies who hold mixed use assets.
Deductibility of
Expenses
So if your asset meets the above criteria as a mixed use asset, the new rules place expenditure in relation to the
asset into three categories:
- Fully deductible: Amounts relating only to the income earning use of the asset, e.g.
advertising, repairs for damage caused while earning income
- Non deductible: Amounts relating to the private use of the asset, e.g. repair of a window
of a holiday home broken while being used privately,
- Apportioned expenses: Amounts incurred that relate to both income-earning and private use,
e.g. rates, insurance, general repairs, interest.
Apportioned Expenses
For expenses that relate to both income-earning and private use, they must be apportioned using the formula:
| Expense x |
Income-earning days |
| |
Income-earning days + counted days |
Where “counted days” are private use days and days where the asset earns exempt income (by being rented to
associates or for less than market value).
Example
|
Tina owns a bach that was used by she and her family during the year for 50 days and rented out to
the public for 100 days. The rest of the year the bach was unoccupied. The total apportioned
expenses for the year were $8,000. The allowable deduction for the apportioned expenses would be
calculated:
| $8,000 x |
100 |
= $5,333.33 |
| |
100+50 |
|
|
Expenditure Quarantining
Rules
The IRD has also introduced expenditure quarantining (or ring fencing) rules around mixed use assets. This means
if you make a loss from your mixed use asset in an income year, you may not be able to claim that loss until such
time the asset makes a profit, when you can then offset the loss.
These quarantining rules apply when the gross income from the asset is less than 2% of the asset value.
Example
|
Tina’s bach has made a loss of $3,500 in the current income year. Tina bought the bach for $275,000
and the gross income for the year from the bach was $4,500. As this is less than 2% of the asset
value, the $3,500 loss would be quarantined and carried forward to a future year where the bach
makes a profit.
However, if the gross income for the year had been $6,000, which is greater than 2% of the asset
value, and still made a loss, that loss would be available to claim in the current income year
against Tina’s other income, as it would no longer be subject to the quarantining rules.
|
These quarantining rules will not apply if the amount of income you earn from the mixed use asset cannot be
separately identified.
Example
|
Tina also owns a helicopter which she uses to check on livestock on her farm. The helicopter is
also used privately. Because Tina can’t identify how much of the farm’s income relates to the use
of the helicopter, the quaranting rules would not apply.
|
Consideration is currently being given to increasing the 2% quarantining threshold for boats and aircraft from 1
April 2014.
Obviously these new rules are very complex and significantly different to the previous tax treatments. We advise
any clients with mixed use assets to keep clear records of private and income-earning use of the asset and
applicable expenses to make life easier when it comes to working out the year-end tax position for these
assets.
All information is correct at the date of article
publication. Please note we provide the information as a service only. Accordingly, the contents are
not intended as a substitute for specific professional advice and should not be relied upon for that
purpose. |
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