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Inland Revenue

Tax Policy

Chapter 1 - Introduction

1.1 In Budget 2011 the Government announced its intention to review the tax treatment of assets used for both private and income-earning purposes (mixed-use assets) as part of its ongoing commitment to ensuring fairness across the tax system.

1.2 This issues paper suggests two alternative methods of prescribing deductions for expenditure in relation to these kinds of assets, and seeks readers’ views on how these methods might work in practice.

The issue

1.3 A good example of a mixed-use asset is a holiday home which is used by both the owner and the owner’s family for private use, and also rented out. Other assets such as yachts and aircraft can also be used in this way.

1.4 Under the current income tax rules, if the inward cash flows derived from a mixed-use asset are assessable income, the owner can claim deductions for expenditure that was incurred in deriving that income. However, the owner cannot claim a deduction when the expenditure is private in nature. These statutory rules are general and can be difficult to apply to mixed-use assets, in particular when it is not clear whether the expenditure relates to either income-earning use or private use of the asset.

1.5 Expenditure relating to these kinds of assets falls into three categories:

  • Expenditure which relates only to the income-earning use of the asset, such as advertising expenditure. This expenditure is clearly deductible.
  • Expenditure which relates only to the private use of the asset, such as repairs to damage caused by private users. This expenditure is clearly not deductible.
  • Expenditure which relates to the time when the asset is not used. An example would be storage fees for a yacht when it is out of the water. It is not clear whether this expenditure is attributable to either the income-earning use or the private use of the asset.

Some expenditure, such as interest, is incurred throughout the year and will fall into all three categories.

1.6 This paper is concerned with the uncertainty that arises around the deductibility of the last category of expenditure described above.

1.7 In 2009 Inland Revenue issued Guidelines on deductibility of expenditure relating to holiday homes. These guidelines are Inland Revenue’s interpretation of the law, but like all guidelines, they have limitations. Guidelines can only offer general advice to owners, and do not have the certainty that specific statutory provisions provide.

1.8 It is not clear whether the correct result is achieved in all circumstances under current law and guidelines. In some instances, owners are claiming deductions which appear to be disproportionate to the income-earning use of assets. An important aspect of our tax system is that it is fair. In this context, owners should only be able to claim deductions when those deductions truly relate to the earning of assessable income.

1.9 This paper outlines two alternative approaches for a set of statutory rules that prescribe and moderate tax deductions for mixed-use assets.


1.10 The suggested new rules categorise mixed-use assets into different groups based on the underlying use of the asset, and prescribe the level of deductions that owners in each group can claim. Two possible alternative approaches are suggested:

  • The first uses a single test to identify whether an owner of an asset has an income-earning focus. If the test is passed, the owner would be able to claim all deductions except for expenditure that is directly attributable to actual private use. If the test is failed, the owner will only be able to claim expenditure attributable to actual income-earning use.
  • The second approach includes the income-focused outcome described above, and also an outcome where the owner is only able to claim expenditure attributable to actual income-earning use. However, it also recognises a third, “middle” category of mixed-use asset, where the asset is used to earn significant income, but also to provide a reasonable level of private use. Expenditure relating to assets in this category is apportioned between deductible and non-deductible.

1.11 The key difference with the second approach is that deductions for expenditure that cannot be easily identified as relating either to private or income-earning use (because it relates to days when the asset is not used) are apportioned based on the level of income-earning and private use.

Summary of suggested changes

  • The suggested changes moderate deductions which can be claimed in relation to mixed-use assets, primarily those deductions which relate to the time the asset is not being used. Assets will be divided into either two or three categories, depending on how they are used, which will determine the entitlement to claim deductions.
    (See Chapter 3.)
  • Various tests will set out whether asset owners will be entitled to deductions for all expenditure which relates to periods the asset is not being used, part of that expenditure, or none of it. The tests will consider matters such as:
    • whether the asset was used for income-earning purposes for 62 days in the income year;
    • whether the proportion of private use in relation to the income-earning use was less than a given threshold; and
    • whether the asset was actively marketed.
      (See Chapters 3 and 4.)
  • The suggested changes will apply only to:
    • assets which are used for both income-earning purposes and privately rented out on a short-term basis and which are unused for at least two months in every 12;
    • land and other assets with a cost of $50,000 or more;
      (See Chapter 5.)
    • assets ultimately controlled by a small number of individuals – that is, assets owned by individuals, partnerships, some trusts, close companies, qualifying companies and look-through companies.
      (See Chapter 6.)
  • For GST purposes, similar proposals will apply to assets held by GST-registered persons.
    (See Chapter 7.)

Key points for submissions

1.12 Specific issues for comment are set out at the end of each chapter.

1.13 Submissions are also invited more generally on the changes proposed in this paper, such as:

  • Would a simple approach, which has an unavoidable degree of arbitrariness be better than a more complex approach where asset owners’ circumstances and their tax treatment are more closely matched?
  • Would the criteria outlined for the various tests detailed in this paper be the best way to identify categories of asset owners?
  • Is the proposed tax treatment of asset owners in each category appropriate?
  • Would the suggested changes create unwarranted compliance costs and to what degree?

Next steps

1.14 Once the consultation period has closed, officials will report to Government, with any legislative changes likely to be introduced to parliament in 2012.

How to make a submission

1.15 Submissions should be addressed to:

Mixed-use assets
C/- Deputy Commissioner Policy
Policy Advice Division
Inland Revenue Department
P O Box 2198
Wellington 6140

1.16 Alternatively, submissions can be made by e-mailing:
[email protected]” with “Mixed-use assets” in the subject line.

1.17 The closing date for submissions is 30 September 2011.

1.18 Submissions should include a brief summary of major points and recommendations. They should also indicate whether the authors are happy to be contacted by officials to discuss the points raised, if required.

1.19 Submissions may be the subject of a request under the Official Information Act 1982, which may result in their publication. The withholding of particular submissions on the grounds of privacy, or for any other reason will be determined in accordance with that Act. You should make it clear if you consider any part your submission should be withheld under the Official Information Act.