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Inland Revenue

Tax Policy



Some assets, such as holiday homes, aircraft and boats are sometimes used to earn income for their owners, and are also used privately. These are referred to as mixed-use assets.

Currently, the tax rules allow deductions for expenditure incurred in earning taxable income and disallow deductions for expenditure that relates to the private use of an asset. However, these rules can be difficult to apply to expenditure that does not clearly relate to either the income-earning or private use of an asset. Examples include expenditure that arises while a holiday home, boat or aircraft is unused, and expenditure on general repairs and maintenance.

Generally, under current law, owners will claim that their asset is available for income-earning use when the asset is not being used privately. This provides them with a basis for claiming tax deductions for expenses relating to this period. However, if the asset is primarily a private asset, or the income-earning and private use are relatively equal, the level of deductions owners can claim will not be aligned with the actual income-earning use of the asset.

The proposed new rules are designed to improve fairness in the tax system by ensuring that tax deductions are broadly aligned with the income that is earned. They are also intended to increase economic efficiency by reducing the extent to which investment in such assets is driven by tax considerations.

The proposed new rules have been developed in response to submissions received on the officials’ issues paper, Mixed-use assets, released in August 2011, and subsequent consultation with interested parties.

Key concepts in the bill

The bill proposes new rules that prescribe the amount of deductions that owners of certain assets can claim. Generally, the rules will apply to assets which are used to earn income, are used privately, and are unused for more than 62 days in an income year.

There are three possible ways to deal with the deductibility of expenditure incurred in relation to a mixed-use asset which does not relate directly to income-earning or private use – such as mortgage interest or rates which relate to periods when the asset was unused:

  • Allow deductions for all such expenditure, on the basis that the asset is available for income-earning use when empty (the present rule).
  • Deny deductions for all such expenditure, on the basis that the asset is essentially a private asset.
  • Allow deductions for some proportion of those costs, on the basis that the asset has a dual purpose.

These proposals choose the proportionate deduction approach. This allows a deduction for general expenditure on the basis of actual income-earning use divided by the total actual use of the asset. So, if an asset is used privately for 30 days, and used to earn income for 30 days, 50 percent of most expenditure will be an allowable deduction.

Specific rules for companies

The new rules apply to assets held by individuals, partnerships and certain companies. Proposed rules for companies override the general rule for companies that interest incurred by companies is always deductible (subject only to the thin capitalisation rules), regardless of the use of the borrowed funds. The special interest deductibility rules in companies also extend to other companies in the same group as the company that owns the mixed-use asset and to shareholders.

Deduction quarantining

Under the proposed changes in the bill, asset owners who generate a loss from their asset and earn less than a 2% rate of return are not able to offset that loss against other income, but can carry it forward to use against future income from the mixed-use asset. This rule is designed to address situations when use is low and the chosen apportionment rule does not deliver a sensible outcome.

Application dates

The proposals in the bill as introduced apply from the commencement of the 2013 income year.

Fiscal implications

It is forecast that this measure will have a revenue gain of approximately $50 million a year.

General theme of the submissions received

Submissions were received from 11 submitters on the mixed-use asset proposals. Submitters ranged from the New Zealand Institute of Chartered Accountants and the New Zealand Law Society to professional firms and businesses involved in renting mixed-use assets. No submissions were received from actual owners of mixed-use assets.

Most submitters stated that they supported the approach of apportioning expenditure based on the use of the asset as set out in the bill. No submitters opposed it.

Matters raised by submitters were:

  • concern about the degree of complexity of the rules applying to companies, in particular; and
  • concern about the proposed loss quarantining rules.

A number of other comments, including many technical comments, were also raised.