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New Tax Rules Proposed for Holiday Homes

AUTHOR: Matthew Gilligan

POSTED: 18 September 2011

The IRD has recently released an issues paper in relation to the tax treatment of mixed-use assets. Whilst the issues paper will apply to a range of assets including yachts, launches, aircraft for example, its application to holiday homes is likely most relevant to readers and clearly the main intended target of these proposed changes.

Current Rules

Currently one is entitled to a tax deduction for expenses incurred in deriving taxable income. In the case of a holiday home where there are periods during which the property is rented, the law is very clear in that the income is taxable and the expenses incurred during that period deductible. When the holiday home is used privately, the law is equally clear in that no expenses are deductible during that period. In between, the holiday home may well be available for rent and the current IRD position in relation to expenditure during this period is that a deduction may be available if genuine attempts are made to rent the property.

Proposed Changes

The IRD want to change the rules in relation deductibility of expenditure during periods in which a holiday home is available for rent but not actually rented. The proposed rules will apply to holiday homes that are unused for at least two months of the year and owned by individuals, trusts, companies that are close companies, qualifying companies, look-through companies and where the holiday home is used both privately and for income earning purposes.

If these criteria are satisfied the IRD are then proposing one of two methodologies for determining whether expenditure will be deductible.

The first option is something of an 'all or nothing' option in that either all expenditure during the downtime will be deductible or none of it will. In order for all of the expenditure to be deductible, the holiday home would have to have been used for income earning purposes for 62 or more days during the income year and the actual personal use be less than 15% of the income earning use. For example, if a holiday home were rented for 80 days during the year then provided the private use were no more than 11 days all expenditure during the remaining days of the year would be deductible provided there was genuine efforts to earn income during that period.

The second option includes a more complicated formula that allows for a partial deduction of expenditure during the downtime periods based on the proportion that the income earning use of the property bears to the private use. Under this test in order to get a deduction for all of the expenditure, once again the asset will have to be used for 62 days or more in a year, but the threshold of private use to income earning use drops to 10%.

GRA Comment

The first point to note that these rules are at proposal stage only. Public submissions on the rules can be made to the Inland Revenue before 30 September 2011.

Whilst the rationale for this overhaul of the rules is relatively sound in that the desired outcome is to tighten deductibility of expenditure in relation to assets that ultimately are more about private than investment use, the proposed thresholds will likely have a significant consequence for owners of property that are genuine investments but used privately from time to time. A typical holiday home investment may well produce more rent on an annual basis if rented periodically to short-term stay occupants rather than on a long-term lease. In such a case there may not be a large number of days where the property is occupied, meaning that the private use threshold, whether it be set at 10% or 15%, is relatively low. It seems unfair to us to then disallow deductibility of all expenditure during downtimes on the basis that it is essentially of a private nature when the asset arguably has a predominant business use.

It was also interesting to note that the IRD issues paper referred to the fact that there are 15,000 holiday homes available for rent in New Zealand based on a survey of eight leading New Zealand websites. One would not be surprised if you had a property advertised on such a site that you attract the attention of the taxman in the future.

As always, if you have a holiday home and are concerned about the application of the mixed use asset rules to you please contact us. Once again these rule changes are proposed only and if you feel strongly about them we encourage you to make a submission or provide GRA feedback and we can accumulate your feedback and submit on your behalf. Please send feedback to info@gra.co.nz.

Request a Meeting

Matthew Gilligan
Director

09 522-7955

mg@gra.co.nz

© Gilligan Rowe & Associates LP

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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.

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