Tax advantage of bachs squeezed
The nation's bach owners will have to work harder for their tax deductions if a new taxation bill is passed, claims the country's largest manager of bachs.
The Taxation (Livestock, Assets Expenditure, and Remedial Matters) Bill is a mish-mash of tax and state sector reform measures and includes moves designed to limit the tax deductions available to bach-owners by linking them directly to the number of days a year they rent the bach out.
Currently, it is possible for people to keep debts on their city homes low, and debts on their baches high, gaining deductibility on interest costs as well as putting the baches into loss-making positions and enabling deductions against personal income.
Many are able to use their baches for personal use a short time each year - for example, 40 days - renting them out for a similarly short period - let's assume 40 days - and also claim the rest of the time the bach was available to rent. That would allow them to claim tax deductions on 325/365ths of the losses the bach makes, as a result of it being highly geared (or carrying a lot of debt).
With the Government struggling to pay for basic services, there is a desire to water down nice-to-have, but inessential and possibly accidental subsidies through the tax system. However, bach-owners could argue that the subsidies have helped create a network of holiday homes throughout the country which has boosted the tourism industry.
The proposed rules, intended to come into force soon on April 1 this year, would allow the bach-owners in such situations to claim half their losses based on 40 days of personal use and 40 days of commercial use, something people who do not own baches may still feel is pretty generous.
While that may reduce the willingness of people to buy baches, effectively lifting the cost of owning them, Bachcare Ltd, which manages and rents out nearly 1000 baches around the country for their owners, is not opposed to the Government's moves.
The business' founder, Leslie Preston, believes that the new rules need to better recognise the realities of the country's baches and their rentability, but she says the proposed rule changes would spark new life, and possible better deals, for those looking for holiday homes.
Preston has told Parliament that the proposed rules should include two maintenance days a year to enable bach owners to keep their places up to a decent rental standard. In the above example, the split would be 42 days commercial to 40 days personal use.
She added there is another aspect of the new tax deduction rules in the Taxation Bill which is too hard on bach-owners, many of whom are not making very much from renting out their little slices of heaven to holidaymakers.
The bill would not allow bach-owners to use any of the losses they make on their holiday homes to be used to offset their personal taxes unless they manage to bring in rental income of at least 2 per cent of the capital value of their bach in any year.
This would be a reasonable level for some bachs, but many would routinely fail to achieve it, though it may sharpen their efforts to win renters.
"In Bachcare's experience, a good rental property where the owner is serious about renting it earns on average $15,000-$20,000 per annum in gross rental returns," Bachcare told the Government in its submission on the bill. "This would be a reasonable to high quality bach in a nice, high demand area."
But there are a lot of baches that do not fit that description, and they may only command $6000-$8000 a year in rental income.
Bachcare says very basic bachs, where the majority of the capital value is land, would struggle to achieve that kind of income, as would top-end bachs valued in the millions of dollars.
Bachcare called on the Government to drop the threshold to 1.5 per cent of capital value, a level which Bachcare described as "more realistic for these types of baches and those outside of the high demand areas.
Bachcare says on average bach-owners only manage to rent their baches out for 40-45 days a year.
The IRD believes that most baches are owned in people's own names, with a minority owned by family trusts.
- © Fairfax NZ News
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