The Inland Revenue Department (IRD) has created a new set of rules relating to the taxation of Mixed Use Assets (MUAs), which replace the old rules that allowed for fairly generous expense deductibility for assets with a strong personal use component.
The new rules progressively came into effect from April 1, 2013.
MUA is an asset used to derive income and used for personal purposes.
The most common example in New Zealand is the renting out of the family bach or holiday home to gain some income to offset against the cost of the property ownership.
However, the rules were widened to include land, motor vehicles, boats and aircraft.
The rules and exclusions relating to MUAs are complex and different, depending on the asset type, value and ownership structure.
Therefore, the following information should be considered as a general guide only and we recommend that if you own a MUA that you speak to a Chartered Accountant to see how the new rules will affect you.
Mixed Use Asset
A MUA is land, boat, motor vehicle or aircraft used partly to derive income and partly for private use and is not used for at least 62 days per annum. The main exclusions from the rules are for residential rental properties, which are used for long-term rentals and boats; or motor vehicles which cost under $50,000.
What are the changes?
Previously the non-deductible proportion of expenses was calculated based on the number of days the asset was used for private use divided by the total number of days in a year.
For example, if Bhavan used his bach in Tauranga for 25 days during the 2013 tax year, his personal use of the property would have been 6.8% (25/365 days per year) and that proportion of expenses would not have been tax deductible.
The new rules came into effect on April 1, 2013. Now the asset owner should work out the total days the property was rented and separate them into two categories: income earning days and private use days.
The formula for the claimable percentage of expenses is income earning days/ (income earning days+ private days).
Income earning days are defined as days when the property is rented to a non-associated person who paid at least 80% or more of the market rental rate.
Private use days are defined as days where you, a family member, friend or associated person have used the property for personal use, irrespective or whether or not that person paid market rent to use the property.
So, if in the 2014 tax year, Bhavan used the property for 20 days, his sister used the property for 11 days paying market rent of $2000 and it was rented to non-associated persons for 40 days, then Bhavan would be able to claim 56.3% (40/40+20+11) of the expenses for the property.
The bright side
On the bright side, the $2000 rental income that he received from his sister is not taxable income as it relates to private days.
In addition, there are some circumstances where the owner can use the property and the asset use is counted towards income earning days, such as spending a couple of days at the bach to repair damage caused by a renter.
Fully Deductible Expenses
You are allowed a 100% claim for expenses, which relate solely to the generation of income on the property such as advertising and commission expenses or having a cleaner come in before and after a renter.
Restrictions to claiming tax losses
If your income from income earning days is less than 2% of the asset’s market value, then you will not be allowed to claim a loss in that income year and you will have to carry it forward. The loss is ring-fenced, which means that you can only offset the loss against future profits made by your MUA.
The market value of the asset for rental properties will be either your latest independent property valuation or the government valuation on the property.
You can opt out of the MUA rules if your income from the MUA is under $4000 a year or you have quarantined expenditure (losses, which have to be carried forward).
If you choose to opt out, you do not return the income that you earn but you are also not allowed to claim any expenses relating to the asset.
Overall, the change in the rules will result in less deductibility of expenses for MUAs and maybe result in you having taxable profits where you previously generated losses.
DFK Oswin Griffiths Carlton is a firm of chartered accountants providing the full range of business advisory and taxation services. Our experienced staff can advise you on all aspects of your business from both a domestic and international perspective.
Nikki Gower is an Associate Director at DFK Oswin Griffiths Carlton based in Auckland. Phone: (09) 3793890 Email: email@example.com
DFK Oswin Griffiths Carlton is the Sponsor of the ‘Best Businesswoman of the Year’ category of the Indian Newslink Indian Business Awards 2014