Changes in the Horizon for Mixed-Use Assets
Broadly, the proposed rules for mixed-use assets will apply from the beginning of the 2013/14 income year. Only land (including buildings) and assets that cost NZ$50,000 or more are affected. To be caught by the new rules the asset must also:
• be used both privately and to earn income;
• not used for at least 62 days (62 working days if the asset is typically only used on work days) in an income year; and
• be held by an individual, trust, partnership or a close company (a close company is a company where five or fewer persons hold more than 50% of the voting or market value interests in the company).
The proposed rules will not apply to:
• motor vehicles; and
• an asset already subject to apportionment based on space, floor area or another similar basis (eg home office or renting out a room to boarders).
The proposed rules broadly define “private use” as:
• any use of an asset by the owner, or anyone associated with the owner, even if the use of the asset is non-exclusive, or a market value amount is received by the owner for the use, or
• where the amount received by the owner for the use of the asset is less than an arm’s length amount.
“Private use” will not include use by a person if:
• it involves expert or specialist knowledge in order for it to be used, and
• the person uses it in that capacity, and
• the income received is market value, which includes an amount paid for the provision of the person’s services.
Where the income from the asset for the income year is less than NZ$1,000, a person will be able to elect out of the rules. The income will be exempt income and the associated expenses will be non-deductible.
Practically, where the rules apply, expenses will be classified as:
• fully deductible – if they are incurred solely for income-earning purposes (eg • advertising) or to meet regulatory requirements for a non-private use; or
• non-deductible – if they relate solely to the private use of the asset; or
• subject to apportionment – if they relate to both the income-earning purpose and private use.
In addition to having to apply the new apportionment rules, close companies will be subject to special rules concerning interest deductions where the debt is equal to or less than the cost of the asset or, in the case of land, a more recent rateable value. Additional rules will apply to shareholders and other group companies to prevent an interest deduction being available for debt that has indirectly funded the acquisition of a mixed-use asset.
The new rules also propose to quarantine excess expenditure when the income derived from the asset is less than 2% of the cost of the asset or, in the case of land, a more recent rateable value. For this purpose, the amount of income will exclude any income derived from associated persons for the use of the asset. The excess expenditure will not be deductible and cannot be used to offset income from other sources. The excess expenditure will be carried forward and may be allowed as a deduction in a future year when income exceeds the deductible expenditure.