ACCOUNTANCY BEYOND THE NUMBERS with Hayes Knight

Should we tax the boat and the bach?

Nestled amongst a suite of tax changes in official government papers released in mid August, there is a whole lot of talk about the so called tax grab on boats and baches. Essentially private assets such as boats and baches could find themselves falling within the tax net if they are actively marketed or used for business for more than 62 days a year.
This is no new proposal, as the changes were announced in May’s budget which was commented on by Hayes Knight at the time – and overall we think it is a good thing. The government has followed through with what it said it was going to do and is making some headway on clarifying the rather muddy waters that exist at the moment.
All too often when we win new clients and perform a review of their structure and their affairs we see assets which are predominantly private structured in such a way that they are able to claim tax deductions for the expenses incurred, but the income is relatively insignificant. Under current rules, there is a very large “gray area”, which is therefore open to aggressive tax positions. Invariably these tax positions will get reviewed by the IRD at some point, and people who thought they were doing nothing wrong can end up with a huge problem – many times greater than the benefit they received by the time interest and penalties are loaded on.
The issue for mixed-use assets, such as boats and baches, is when people partly use those assets themselves but also lease them to others and claim deductions for expenses. 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 always causes some consternation, and the rules are unclear around the interpretation of “availability”.

So, what are the details?
Assets which are used both for both private purposes and earning income which remain unused for two months or more out of every 12 months will fall into the rules if they are worth $50,000 or more. From there, a series of tests will set out whether owners of the 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.

What do we think?
The proposals are necessary to sort out a messy area of the law which is open to wide interpretation and hence confusion, rather than abuse. The amount of revenue at stake is probably pretty small so the rules want to be clean and simple for the average New Zealander to understand. I think the government is right to have a look and clarify the system, but as usual I beg them not to let the regulators get too over-zealous and make the rules a nightmare of complexity. With approximately 15,000 holiday homes rented out, and only $50 million in deductions at stake, probably most of them being absolutely fine let’s not load a huge cost on the taxpayer and spend more on regulation than we will collect in revenue. Our biggest danger is making a set of rules far too big for the size of the problem.
Good on the government for having a go, now watch this space!

For more information on Hayes Knight please visit our www.hayesknight.co.nz