Bach owners socked by new tax deduction law
enablers to bach ownership has been the ability to rent out your property when you’re not using it, and enjoy both the income and the ability to claim deductions. But two weeks ago the legislative framework that allows this to happen changed dramatically.
The diversely named Taxation (Livestock Valuation, Assets Expenditure and Remedial Matters) Bill became law on July 17, 2013. First referenced in the 2012 Budget, it tightens the rules around deducting expenses related to assets that are used privately by the owner and also used to earn income. Such ‘‘mixed use assets’’ include holiday houses, motor vehicles, boats and yachts which are rented out periodically.
To date, the practice of claiming costs on holiday homes has been pretty fluid. Inland Revenue’s guidelines suggested you could claim expenses for all the time the property was marketed to tenants and able to be rented. This meant that if an owner stayed in their bach 10 nights a year, and marketed it 355 nights a year they were able to claim the costs of those 355 nights against the income they created (regardless of how many nights it was let).
The IRD reckons this has likely led to the over-claiming of deductions for mixed use assets. And one official noted to me, there’s likely to be a fair few owners of flash yachts who have done pretty well out of such arrangements.
Under the new act, expenses related to both private and paid use of the asset (like rates and mortgage) will be apportioned using a new formula.
This takes the number of paying days the asset is used and divides it by the total number of days used (both personal and paid). At the same time, there is a new requirement that owners need to earn at least 2 per cent of the RV of a property in any given year if they wish to claim bach expenses against their broader income.
Neither of these changes will be welcomed by bach owners, but they will serve to prevent cunning types debt financing flash assets while getting subsidised by other taxpayers. One group that will be disadvantaged will be those owners who make an honest fist of renting their property out, but have an unrealistically high RV, and will never come within a bull’s roar of reaching the 2 per cent valuation threshold.
A couple of bitter pills fall out of the implementation process.
The first is that although the changes have only just become law, they will be applied retrospectively to baches. So rather than being able to plan or get their documentation systems in order, bach owners get lobbed into the new regime halfway through an income-earning period, which doesn’t seem very fair. Particularly when detailed book-keeping suddenly becomes vital.
Unless the IRD writes to those 15,000 owners, I reckon a good number of bach owners will get seriously nobbled at the end of the tax year.
The second is that the owners of the super-yachts, aeroplanes and flash mobile homes all get a reprieve.
All the mixed use assets that aren’t holiday homes have implementation deferred until 1 April 2014. The official line is that this gives IRD more time to ascertain the number of these assets and time for the owners to transfer them out of complex ownership structures.
To my way of thinking, this gives the biggest asset owners more time to prepare and potentially work out ways to mitigate the new law: this seems a sock in the face to the poor old bach owners. And unlike the Southland socks, it won’t bring a sweet taste to their mouths.
Mike ‘‘MOD’’ O’Donnell is head of operations for Trade Me (which owns holidayhouses.co.nz and holidayhomes.co.nz ) and a professional director. His Twitter handle is @modsta and he favours a West Coast scoop.