Finance: Tax rules for baches shaken up

Close to 15,000 holiday homes will have to abide by new rules that came into effect in July, if the asset is used for income and private purposes.

My in-laws have a family member arriving in summer, so my wife has booked a bach for us in Mangonui. We will use it as a base while we tick off the tourist sites we have in mind to show him.

It's probably inappropriate to call it a "bach" - it's more adequately described as holiday-home rental. Unless I have missed something, I'm pretty sure there's not a bunch of single guys living there.

Looking through the holiday home and bach websites, there are 8000 or so baches up for temporary letting. However, closer to 15,000 holiday homes will have to abide by new rules that came into effect in July, if the asset is used for income and private purposes.

The Taxation (Livestock Valuation, Assets Expenditure and Remedial Matters) Bill restricts the ability of owners of mixed-use assets to deduct expenses. Mixed-use assets include holiday houses, motor vehicles, boats and yachts that are rented out periodically.

But it will be the bach owners that this applies to first. They must apply these rules retrospectively, from April 1 this year. People who rent out assets such as a boat or a plane have until April 1 next year before these rules kick in for them.

So what do bach owners need to know? For a start, you need to understand that these rules are complicated.

For the rules to apply, the asset must be unused for private- or income-earning purposes for more than 62 days of the year. Expenses relating to business-use periods will be deductible; expenses for private-use periods are non-deductible.

The new apportionment formula divides the number of paying days the asset is used by the number of days it is used privately. This percentage is then applied to the period the bach is available and not used. This is in contrast to prior years, when deductions were based on the marketed nights available versus the nights used privately.

You can elect out of the rules if the income you derive from the asset is less than $4000 - expenses will be non-deductible. Even people who pay full rent will count towards private use.

An important one for companies is that interest costs in "close" companies with mixed-use and full-earning assets must first attribute interest costs to their mixed-use assets. This may have dire consequences for deductions.

The rules are complex and suggest discouragement of companies owning mixed-use assets. There are exemptions so check this out with your accountant.

Jeremy Tauri is an associate at Plus Chartered Accountants.