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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:

  1. Fully deductible: Amounts relating only to the income earning use of the asset, e.g. advertising, repairs for damage caused while earning income
  2. 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,
  3. 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.

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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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