Mixed use asset rules tightened

Finance Minister Bill English has described 2012 as ‘‘a bit of a difficult year’’ as he defended the sub-optimal tax take for the first nine months.

Budget 2012 was released last Thursday and included changes to help modernise the tax system. One of the changes was the entitlement to tax deductions on mixed use assets. However, the change was not new. It was first announced in last year’s budget and was debated with the private sector through a consultation process.

Mixed use assets is a term coined by the government to describe assets such as holiday homes, luxury boats and aircraft that are used for both business and private purposes.

Currently owners of mixed use assets can claim tax deductions for expenses for the part of the year that the asset is available for business use. For example where a holiday home is available for rent for 11 months of the year, expenses relating to the 11 months will be tax deductible even when the home is rented for only one of the 11 months.

The new rules will require the owner to calculate the tax deductible expenses based on an apportionment of the home’s actual private use and business use. In the same example the holiday home was rented out for one month and owner occupied for one month. The new rules will allow the owner a tax deduction for 50 per cent of the outgoings on the property.

The philosophy underpinning the change is to bring the tax system in line with the economic reality of such assets.

The Government is forecasting the change will generate about $109 million of additional tax revenue over the next four years.

Kiwis with mixed use assets will need to keep sufficient records as evidence of the business and private use. Penalties exist where reasonable care is not taken to determine the correct tax liability.