We have spent a lot of time working with the new mixed use asset rules, as we have a number of clients with expensive baches, launches and aeroplanes that are used on a mixed use basis. While the intent of the rules is relatively straightforward, to be honest we have at times found it difficult to apply the actual law to factual situations.
The thing that will catch people is the GST adjustment. With the new mixed use asset rules, people need to recalculate their business use percentage based on the new rules. As a consequence of this, an output tax adjustment is required based on either past use or estimated forward use. We have worked on a US$10m plane so as you can tell, the cash flow consequence of this can be significant.
This is particularly the case when you consider that the GST rules changed in 2011 so that inputs were no longer based on the primary and principal test, but rather the expected use of an asset. As an example whether an asset is used 10% for business or 80% for business that becomes the relative percentage input both of the capital item and in terms of the ongoing operating and holding costs for GST purposes.
Many taxpayers and GST registered persons have not thought about the consequences of the GST adjustment, and it will catch out many with holiday homes, boats and planes who have previously had them in the GST net. The increase in rate to 15% also won’t help.
If you would like to discuss the rules and how you are currently applying them please email or call Nigel Smith.