ACCOUNTANCY: With Matthew Bellingham, Bellingham Wallace
Taxing the toys
If you’ve been snared by the mixed asset rules, then it would be a fair to assume that you’re going to be paying more tax, repaying some GST if you claimed GST when you purchased the asset, and spending more on compliance costs.
A quick recap: On 1 April 2013 new tax rules came into force for taxpayers with baches or boats used for both private and business purposes. Similar rules were applied to airplanes and helicopters a year later on 1 April 2014. These items are classified as mixed use assets if they are:
- Used both privately and for income earning purposes;
- Not used for at least 62 days in an income year;
- Have a cost price of more than $50,000; and
- Held by an individual, partnership, trust or close company.
In our experience there are generally three scenarios when an asset falls within these rules:
- When a bach or boat is rented out to third parties and the owner for market value. The use by the owner is now deemed to be private use.
- When an airplane or helicopter is held in a private company (which has other investments or is an operating company) and is rented out to third parties and the owner for market value. The use by the owner is now deemed to be private use.
- When an airplane or helicopter is held personally and the owner pays market value for the use. The use by the owner is now deemed to be private use. Additional tax implications arise in this situation.
There are some exemptions that can apply, however from a practical perspective they would make little sense. Having worked through the impact of the mixed use asset rules with various clients, I can confidently say that the implications are significant and can include a significant GST cost if the GST on the original asset purchase was claimed. The other key tax implications, include:
- Expenses need to be apportioned between deductible and non-deductible;
- GST on expenses cannot be fully claimed (a formula applies);
- If the asset generates a total loss, this loss is likely to be ring fenced;
- If you are GST registered and originally claimed the GST on the asset, a GST adjustment should have been considered.
Where the asset is owned by a company there are additional rules which can impact interest deductions, record keeping requirements, and the transitional period rules which provide options to restructure the ownership of the asset.
So what does this practically mean for you?
- If you have an asset that is subject to the mixed use rules your tax position will change;
- If you do not heed the rules shortfall penalties could apply and use of money interest on late paid tax will apply; and
- Costs incurred in representing yourself if the IRD issue you with a request for information.
Ignoring the implications of these rules or putting them in the ‘too hard basket’ is a risky move because the IRD has announced that it will be focusing on these adjustments later this year. At Bellingham Wallace we offer a range of services including our Mixed Use Asset Health Check which reviews your position at a high level without having to incur significant costs.
For more information please contact Graham Lawrence: