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Inland Revenue

Tax Policy

Application of the rules

(Clauses 19 and 35)

Summary of proposed amendments

The new rules will apply to assets that are used to earn income, are used privately and unused for a period during the year. Assets typically used in this way are holiday homes, boats and aircraft. Expenditure on motor vehicles and assets that are subject to apportionment of expenditure based on space (such as a room used as an office) is excluded from the new rules.

The new rules will apply to assets held in a range of structures, such as assets held by individuals, partnerships, trusts and certain companies.

Application date

The amendments will apply from the beginning of the 2013–14 income year.

Key features

The new rules will apply to all forms of ownership, whether the asset is held by an individual, a trust, a partnership or a company. However, when the asset is held in a company the rules will only apply to close companies.

Only assets that are used in a particular way will be subject to the new rules. New section DG 3 states that assets will be within the rules if they are:

  • used to earn income;
  • used privately; and
  • not used for at least 62 days (62 working days if the asset is typically only used on work days) in an income year.

An asset used in this way will not be subject to the new rules unless it is land (including improvements to land) or has a cost greater than $50,000 (“cost” refers to the cost of the asset to the person).

Section DG 3(2) excludes from the rules motor vehicles and assets when existing methods of apportioning expenditure based on space are used. For example, a person who uses a room in his or her family home for business purposes will still be required to apportion expenditure on a floor area basis.

“Private use” is defined in the new rules under section DG 4. Private use includes use, regardless of whether market value is paid, by the person who holds the asset or a person who is associated with that person. For the purposes of these rules, associated persons include a partner, siblings, parents, children, grandparents and grandchildren. However, private use will not include use by the person if the asset is of a type that requires expert or specialist knowledge in order for it to be used, the person uses it in that capacity, the income derived directly or indirectly from the use is at market value, and the income derived includes an amount paid for the services of the person. For example, a helicopter used by the owner, for the owner’s commercial farming operation, would not be considered to be private use.

Any use at below market value will also be regarded as private use of the asset. Market value is considered to be the price for the use of an asset at a particular time in an open market, freely offered, made on ordinary terms, and to a member of the public at arm’s length.


Under current legislation a person is allowed a deduction for expenditure incurred in earning income or in the course of carrying on a business. No deduction is allowed, however, if the expenditure is private or domestic in nature.

These two general rules are difficult to apply to expenditure that has both income-earning and private elements. This type of expenditure often arises when assets such as holiday houses, aircraft and boats are used partly to earn income, partly used privately, and are unused for a portion of the year.


A holiday house is used by the owner and the owner’s family for 30 nights and rented out for 30 nights in an income year.

There is no concern about the owner claiming deductions for expenditure which directly relate to the 30 nights the house is rented out. It is equally clear that no deductions can be claimed for expenditure that directly relates to the 30 nights when the house is used by the owner and the owner’s family.

However, it is unclear to what extent the owner can claim a deduction for expenditure that arises when the house is not in use, or expenditure that does not clearly relate to either the income earning or private use of the house, such as repairs and maintenance. Present rules presume that provided the asset is “available for income-earning use”, the associated expenditure is deductible.

Consequently, the new rules focus on assets that are used to earn income, that are used privately and are unused for a period during the year. They do not apply to assets where existing rules provide a reasonable basis for apportioning expenditure – such as motor vehicles, that are subject to fringe benefit tax or the log book rules. Further, the rules will not apply when rules and existing practice operate to apportion expenditure based on floor area.

Since assets used in this way can be held in various entities, the rules apply to a range of entities types and structures. The new approach is intended to avoid creating an incentive for owners to shift assets from one entity type to another to achieve a more favourable tax outcome. However, when such assets are owned by companies, this has led to complex and detailed rules, particularly for interest apportionment.