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Inland Revenue

Tax Policy

Chapter 2 - Legal background and the case for change

2.1 The ability of owners of mixed-use assets to claim deductions for expenditure is a consequence of the current statutory framework, case-law, and Inland Revenue’s approach to that statutory framework. The various elements are discussed below. Due to the uncertainty in this area a “case for change” is presented.

Statutory provisions

2.2 Apart from subpart DE of the Income Tax Act 2007, which sets out the rules for motor vehicles there are no specific statutory rules governing deductibility of expenditure relating to mixed-use assets.[1] For all other mixed-use assets, the approach used to determine deductions can only be extrapolated from general statutory rules and case-law.

2.3 The following two statutory rules set out the fundamental requirements for expenditure to be deductible:[2]

  • section DA 1: A person is allowed a deduction for an amount of expenditure or loss (including an amount of depreciation) to the extent to which the expenditure or loss is incurred in deriving their income (both assessable and excluded income) or incurred in the course of carrying on a business for deriving such income; and
  • section DA 2(2): A person is denied a deduction to the extent to which the expenditure is of a private or domestic nature.

2.4 Broadly, a person is allowed a deduction for expenditure incurred in deriving assessable income or in the course of carrying on a business. However, that person is unable to claim a deduction for expenditure that is private in nature. In addition, the rules contain the phrase “to the extent”. This phrase contemplates that an item of expenditure may be apportioned between the amount that is attributable to income-earning use and the amount attributable to private use.

2.5 These statutory provisions can be difficult to apply to mixed-use assets, since a mixed-use asset has both income-earning and private use elements. Determining what expenditure is attributable to income-earning use, or carrying on a business (deductible expenditure) as opposed to the private use of the asset (non-deductible expenditure) can be difficult when expenditure relates to periods when the asset is not being used.


A holiday home is used by the owners for five weeks per year and is also rented out for five weeks per year. The owner has incurred expenditure that directly relates to the actual private use of the home, the actual rental use of the home, and expenditure that relates to the 42 weeks of the year when the home was not in use.

There is no concern about the owner claiming deductions for expenditure which relates to the five weeks per year the home is rented. It is equally clear that no deductions can be claimed for the five weeks per year when the home is used by the owner. The issue is to what extent the owner should be able to claim deductions which relate to the 42 weeks per year the house is empty.


2.6 The leading case on mixed-use assets is CIR v Banks (1978) 3 NZTC 61,236. In this case the taxpayer used a room in his house for income-earning purposes for a certain number of hours per week for a certain number of weeks of the year. The Court of Appeal was asked to consider whether a deduction could be claimed for any proportion of a private home used for income-earning purposes, and held that a deduction could be claimed. However, the Court of Appeal noted that determining an appropriate apportionment calculation was difficult. The Court accepted an apportionment method which provided a deduction for some expenditure relating to periods of non-use.

2.7 In Buckley & Young Ltd v CIR (1978) 3 NZTC 61,271, the taxpayer paid amounts to an employee to obtain the employee’s resignation and for a restrictive covenant. The question for the Court of Appeal was whether the expenditure should properly be treated as deductible or on capital account. The Court made some interesting comments about deductions in relation to mixed-use assets:

The circumstances of the particular case will usually determine what is the most apt way of deciding how much of the expenditure is attributable to the deductible item. For example, where an asset, such as a house or car, is used for both business and private purposes, the apportionment of total expenses must be fairly based on the use (and some cases availability for use) for business purposes and private purposes respectively. Even so, it is impossible to prescribe any precise formula applicable to all cases. Each such case depends on its own circumstances. It is the yardstick of factual use, or availability for use for business purposes, that satisfies the requirement that the apportionment must be fair not arbitrary, and must be done as a matter of fact.

2.8 “Factual use” criteria underlie both Inland Revenue’s interpretation and suggestions for a new approach in this area, discussed in subsequent chapters.

2.9 The court later made the following more general comment about apportionment:

The more difficult class of case is where each advantage is intangible and does not lend itself to measurement against any conventional yardstick. It then becomes a matter of deciding whether there is any, and if so sufficient, evidence to justify a conclusion that some particular part of the total expenditure is actually attributable to a deductible item, or at least a minimum fractional share of the total expenditure can be realised as so attributable. If there is insufficient evidence to arrive at a conclusion, any answer must be mere speculation and the taxpayer will have failed to discharge the onus of proof upon him.

2.10 This statement is clear authority for a restrictive approach to be taken to allowing deductions relating to expenditure incurred during periods when mixed-use assets are not actually being used.

Inland Revenue’s guidance

2.11 As noted above, the owners of mixed-use assets other than motor vehicles must apply general law to determine the deductibility of their expenditure. One way to bridge the gap between general provisions and situations which give rise to interpretative difficulty is by way of guidance published by Inland Revenue. While this guidance is not binding on taxpayers or Inland Revenue, it can provide a greater level of certainty than would otherwise exist. Taxpayers typically apply these statements to their situation with a reasonable level of confidence if their circumstances are close to the circumstances described in the guidance.

2.12 In 2009, Inland Revenue released a Questions we’ve been asked (QWBA) entitled “Holiday houses – income tax treatment”. It gives guidance to owners of holiday homes on deductions they could claim, and specifically whether they could claim deductions for non-use periods (Tax Information Bulletin, Vol 21, No 3, May 2009).
(See also

2.13 The QWBA indicated that if the holiday house was advertised as genuinely available for use in the empty periods the owner could, in certain circumstances, claim deductions for expenses incurred in these periods. However, when a holiday home was essentially available only to the owner, and the owner’s family and friends, and available to rent to third parties on a limited basis, no deduction could be claimed for the period the home was not rented.

2.14 The QWBA indicated that additional evidence would be required before an owner could claim expenditure for non-use periods:

Evidence of a holiday house being available for rent generally needs to be more than a mere statement of its availability, sporadic or limited advertising, or advertising that is of a nature that is unlikely to attract many customers. There must be evidence of active and regular marketing of the holiday house at market rates and of the availability of the holiday house at times and for periods that demonstrate the holiday house is earning rental income or is genuinely available to earn rental income.

If a holiday house is available for only limited and/or undesirable periods and/or at non-competitive rates, such factors tend to indicate that the expenditure is not incurred in deriving assessable income.

2.15 Examples were provided to demonstrate the application of the current rules:

  • A holiday home earns significant rental income and is actively marketed, but used by the owners for two weeks over Christmas and New Year. The owners can claim deductions for the entire year with the exception of the two weeks the property is used.
  • A holiday home is used privately for most of the year and rented for two weeks per year. The owners can claim deductions only for the period the holiday home is actually rented out.

The case for change

2.16 As discussed, the statutory tests apply to allow a deduction for expenditure incurred in deriving income or in carrying on a business, and deny a deduction for expenditure which is private in nature. However, the application of these statutory rules to expenditure that relates to the time the asset is unused is uncertain. The fundamental difficulty with this type of expenditure is that it could be argued that both sections DA 1 and DA 2(2) of the Income Tax Act 2007 apply to it.

2.17 CIR v Banks and other cases arguably provide support that a deduction for such expenditure is allowable on an apportionment basis, but do not provide detailed rules on how any apportionment is to be applied.

2.18 While Inland Revenue’s QWBA guidance is a logical approach to resolving the application of legislative uncertainty in this area, there are some limitations:

  • The guidance applies only to holiday homes, and does not cover other assets which might be both used privately and rented out, such as yachts.
  • The examples given are necessarily limited and cannot cover all situations.
  • As with all guidance, only general advice can be provided and taxpayers are free to argue that it does not apply to them.

Increasing deductions claimed

2.19 While it has always been possible to rent out these kinds of assets, the practice has increased in recent years for a number of reasons – including:

  • Dedicated internet sites for holiday homes make it easier to rent out holiday homes by providing renters with detailed information about properties on offer.
  • A number of yacht charter businesses which market through the internet have been established where private yacht owners can list their yacht. The yacht charter business advertises the boats and arranges for them to be chartered, returning some of the charter fee to the yacht owner.

The need for fairness and certainty

2.20 The discussion set out in this chapter illustrates some of the difficulties arising from the current tax deductibility rules for mixed-use assets.

2.21 This situation gives rise to less-than-ideal outcomes in terms of fairness, certainty and economic efficiency, all of which are important elements of a good tax system.

2.22 The remaining chapters of this paper explore options for a new legislative approach to determining the eligibility of owners of mixed-use assets for deductions, with the objective of making the rules fairer, more certain and more economically efficient.


1 These rules are briefly discussed in Chapter 5, “Assets subject to the new proposals”.

2 Income Tax Act 2007.