The government’s tax-grab on boats and baches will kick in if the assets are actively marketed or used for business more than 62 days a year.
Those details have emerged in official government paper released this week. The proposals are part of a suite of tax changes announced in this year’s budget.
Now, ministers have released discussion documents on the taxation of ‘mixed use assets’ - such as baches – along with livestock rule changes.
The issue for mixed-use assets, such as baches, is when people partly use those assets themselves but also lease them to others and claim deductions for expenses.
The issue is aligning the expenses claimed with the actual use of the asset by third parties, and ensuring that the owner does not, in effect, claim a tax deduction for the full expense.
Revenue Minister Peter Dunne said the issue of fairness arose when an asset, such as a bach, was empty for long periods.
“This provides them with a basis for claiming tax deductions for expenses relating to the period the property is empty. Claiming these deductions could be regarded as unfair, particularly if the owner holds the asset primarily for private enjoyment.”
The livestock rule changes relate to the valuation method used to calculate the tax for farm herds.
The current rules – which have been used for over a decade allow farmers to use either the national standard cost scheme, or the herd scheme, and can regularly switch between the two as they like.
This allows farmers to take a one-way bet: if the value of their stock goes up over the course of the financial year, they opt for the method which taxes them at the cost they bought them; and if the value drops, they opt for the market value scheme, which allows them to claim a tax deduction for the loss.
The country’s largest farm owner, government-owned Landcorp, has used the scheme, as have most private farmers.
Bach tax: details
A series of tests will set out whether owners of a bach or other mixed use asset can deduct all expenditure which relates to periods when the asset is not being used; part of the expenditure,or none of it.
These will cover:
• 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.
The changes will only apply to assets which are used both for earning income and are rented out on a short-term basis and which are unused for at least two months out of every 12 months; and which also are worth $50,000 or more.
The assets can be owned by individuals, partnerships, trusts, and closely held companies, qualifying companies and look-through companies. If the owner/taxpayer is GST registered, a similar approach will apply to the GST part of any deductions.
Submissions close on September 30.
Don’t make these holiday home rules too complex, tax expert says
The “bach tax” proposals cover a necessary gap but risk being too complex, says a leading tax practitioner.
“It’s fair enough to look at this issue, for certainty, for equity and foreconomic efficiency reasons,” PricewaterhouseCoopers tax partner Geof Nightingale said. “But you want to make sure the rules you use are not too complex for the size of the problem.”
The government has released a discussion document which outlines options aimed at tightening up how much the owners of holiday homes and other similar assets can claim as a tax deduction if they rent out their bach.
Of particular concern is the question of how much can be claimed when the bach is empty.
The IRD calculates there are about 15,000 holiday homes, a figure it reached by surveying the baches advertised publicly.
It is estimated there is about $50 million a year claimed in tax deduction on those baches. The IRD is not looking at clawing back all of this, only as much as might legitimately be said to be part of the costs of personal use rather than part of leasing the baches out to other parties.
“What I think is missing is a ‘safe harbour’ clause here,” Mr Nightingalesaid. “Technically if you let someone rent your bach for just one night you should be caught by this. I think they need to have to allow a small amount of usage before you got caught .”
The tax crackdown is unlikely to reap much in the way of extra revenue for the government, he said.
“But for my money this is not about the revenue, it’s about tax policy integrity and economic efficiency.
“It doesn’t make sense to leave a tax incentive to invest in holiday houses, so they’re right to try to fix it.
“They should just make sure it is not too complex.”