In the Budget 2011 the Government announced its intended review of the tax treatment of assets used both for private and income earning purposes (mixed use assets). A consultative document was released by the Inland Revenue Department in August 2011 and submissions to this consultative document were due by the 30 September 2011.

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Based on this document any changes are likely to be introduced to the Parliament in 2012 year. Mixed-use assets to which the new rules will apply will, for example, include holiday homes, boats, yachts and light aircrafts. The recently issued paper by the Policy and Advice Division of the Inland Revenue Department suggests 2 alternative methods of prescribing deductions for expenditure in relation to these kinds of assets.


Under current rules, if the income derived from the use of mixed asset is taxable, the owner of that asset can claim deductions for the expenditure that was incurred in production of that income. However, the owner cannot claim deductions when it is of a private nature.


These rules, briefly described above, can be difficult to apply to mixed-use assets, in particular, when it is not certain whether the expenditure relates to income earning or private use of the asset. Interest, storage fees for a yacht when it is out of the water, would fall in this category as it is unclear whether this expenditure is attributable to income earning or private use of the asset. The purpose of the issue paper is to explore rules that are fairer, more certain and more economically efficient.


The issue paper proposes two new alternative methods that will only apply to:

  • Assets which are used both for income earning purposes and privately rented out on short term basis and which are unused for at least 2 months in every 12 months
  • Land and other assets with a cost of $ 50,000 or more
  • Assets ultimately controlled by a small number of individuals, partnerships, some trusts, close companies, qualifying companies and look-through companies.



The suggested new rules categorise mixed-use assets into different groups based on the underlying use of the asset, and prescribe the level of deductions for all expenditure which relates to periods the asset is not being used, part of that expenditure, or none of it that owners can claim. Two suggested methods are as follows:

  • 1st Method: uses a single test to identify whether the owner of an asset has an income-earning focus. If the test is met than the owner will be able to claim all deductions, except for the expenditure that is directly attributable to the private use of the asset. If the test is not met, then the owner will be able to claim expenditure to the extent that they are directly linked to the income earning process.
  • 2nd Method: includes the income earning focus, described in Method 1 above, and also an outcome where the owner is only able to claim expenditure directly attributable to the actual income-earning use. It also recognises a third “middle “category of mixed-use asset, where the asset is used to earn significant income, but also to provide reasonable level of private use. Expenditure relating to assets in this category is apportioned between deductible and non-deductible. The key difference between 1st and 2nd Method is that deductions of expenditure that cannot be easily identified as relating either to private or income earning use( because it relates to the days when the asset is not used at all) are apportioned based on the level of income earning and private use.


Furthermore, various tests will be set out to determine whether the owner’s entitlement to claim deductions for expenses that relate to the period(s) during which asset is not used at all. The tests are substantially similar for both methods. They are summarised in the table below:


EXAMPLE: X Family owns a family home in Coromandel. In the 2013 tax year the family actively marketed the house at market rates in newspapers and on internet. The house was rented out for 95 days in that income year. The X Family also used the holiday home for private use for 14 days over 7 weekends during the year. The X family incurred the following costs:

  • $2,500 directly attributable to the income earning use of the house
  • $500 directly attributable to the family’s private use of the house
  • $7,000 attributable to the time when the house was empty The total amount of expenses that the X Family will be able to claim will depend upon whether 1st or 2nd Method is applied.


Since family satisfies all the elements of the test, the family is able to claim:

$2,500 of expenses that was directly attributable to income earning use of the house
$7,000 of expenses that was attributable to the time when the house was empty
$9,500 represents the total expenses that can be claimed

Should family decide to use their family home for an extra weekend, raising their private use to 16 days, the family would not satisfy the test (as private use will be 16.84% of income earning use). In this situation the family would only be able to claim the $ 2,500 of expenses that was directly attributable to the income-earning use of the holiday home.


Since family satisfies the First Test and fails the Second Test, the family will be able to claim:

$ 2,500 of expenses that was directly attributable to income earning use of the house
$ 6,101 a proportion of the $ 7,000 of expenses that was attributable to the time when the house was empty (see below Formula for calculation of apportionment)
$ 8,601 represents the total expenses that can be claimed


Whilst these methods and tests are proposals at this stage, we will see some changes in this area in due course. We favour the introduction of the brightline tests, as they will provide ease of use for both the IRD and the taxpayers. These tests will also provide certainty and at the same time will prevent IRD from arbitrarily passing judgement on what constitutes a reasonable level of marketing, reasonable private or income earning use of the asset, etc.

by Martina Evans, Covisory Partners Limited

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