Mixed Use Assets – new rules

 

There are new rules for mixed use assets.

A mixed use asset is one used for both private and earning income – and which is also unused for at least 62 days in any tax year.  This includes holiday homes, boats and aircraft.

Although the rules have not yet been enacted by parliament, they will be backdated for most taxpayers to 1 April 2013 for holiday homes – and will come into effect from 1 April 2014 for boats and aircraft.

In general, the new rules work like this:

Let’s say you have a holiday home which is used privately for 100 nights per year and is rented for 50 nights through Book-a-Bach.  It is unused for the remaining 215 days per year.

The income received from the 50 nights of rental is taxable – as it has always been.  But the changes relate to the deductibility of expenses.

Under the old rules, expenses were tax deductible except the portion relating to the 100 nights of private use.  Therefore 265 nights ÷ 365 nights = 72.6% of the expenses were deductible.

Under the new rules, only the proportion of rented nights compared to total nights of use will be tax deductible.  So 50 nights ÷ 150 nights = only 33% of the expenses will now be deductible.

For almost all mixed use assets, this will mean a reduction in tax deductions.  Last year’s budget indicated these changes would increase the tax take by around $109 million over the next four years.

The new rules have many provisos and exceptions.  Some that will be commonly applied are these:

1. The rules don’t apply to long term residential property rentals, business assets where the private use is minor – or to a home office where the expense is claimed on the basis of floor area;

2. Boats and aircraft are excluded from the new rules if their original market value when purchased was less than $50,000.

3. Private use has a rather broad meaning.  It includes use by you, your family or associated people.  Even if you receive market rent from family or associated people, the use is still private.  And if you receive less than 80% of market rent from a non-associated person, that use is also private;

4. If income is less than 2% of the value of the asset, you cannot claim any loss in the current year – it carries forward to the next financial year but is ring-fenced so it can only be used to offset income from that asset;

5. If income is less than $4,000 for the tax year, you can keep the income and the expenses out of your tax return. 

The new rules have many complexities, which are impossible to cover off in under 500 words.  Make sure you get proper advice from your accountant that takes into account your own individual circumstances before taking a tax position in relation to mixed use assets.