Planned new law changes hit bach owners

MIKE O'DONNELL
Last updated 05:00 08/12/2012

Relevant offers

Opinion & Analysis

Status quo for employment law Stick or twist this election Will ye go, lads and lassies, or will ye no? Little things that count in life? Can leopards change their spots? Desperately seeking sustainable rail Emotional debt is a form of self-harm Capital gains tax would be a boon for advisers Honesty always the best policy Time to have fun with wine

OPINION: If you listen really carefully right now it's almost possible to catch the sound of panic as thousands of Kiwis realise there's less than three weeks until Christmas and they still haven't secured their holiday accommodation.

They're the ones currently online or on the phone, trawling through lists of hotels and motels trying vainly to secure their spot in the Kiwi summer.

The smart ones, of course, have had this sussed for months, and the really smart ones have completely steered clear of hotel hell and motel mayhem.

A few years ago my family and I made a discovery when it came to holiday accommodation, and that discovery was holiday houses.

Instead of sterile motel rooms, overpriced hotel laundries and High Street settings, we got to love colourful interiors, all-inclusive facilities and hand-picked locations.

Better than that, they normally have a shelf of great books and generous kitchens. And like good craft beer, once you've tried it, it's hard to go back.

There are about 15,000 baches in New Zealand, and since the 2008 global financial crisis they don't appear to have been increasing in numbers. The contracting economy and recent indications that property prices are rising again mean that owning a bach is out of reach for most families.

One factor that has always benefited bach ownership has been the ability to rent out your property when you're not using it, and enjoy both the income and the ability to claim tax deductions.

Last week a draft piece of legislation quietly entered Parliament that would see that situation change, and possibly cap the growth of bach numbers.

The Taxation (Livestock Valuation, Assets Expenditure and Remedial Matters) Bill had its first reading last week. First flagged in the 2012 Budget, the bill tightens the rules around deducting expenses related to assets that are used privately by the owner and also used to earn income. Such "mixed use assets" includes holiday houses.

The current situation around claiming costs on holiday homes is pretty fluid. The IRD guidelines suggest you can claim expenses for all the time that the property is marketed to tenants and able to be rented.

So if an owner stays in their bach for 36 nights a year, they can claim expenses for the other 90 per cent of the year, assuming the house is marketed and available for rent.

Two proposed changes in particular will have an impact, and will come as something of an eye-opener for bach owners who have historically had things made easier thanks to the IRD.

First, a new formula is being introduced to determine the proportion of bach expenditure that can be claimed. This moves away from an arrangement where you claim based on the property's availability, to one based on the proportion of rented versus total use.

Ad Feedback

Under the proposed law, if you rent your bach out for 50 nights and use it yourself for 100 nights, then you can claim 33 per cent of the common costs (i.e. the fraction from 50 nights rented over 150 total nights in use) in that year.

That compares to the current state of play where you can claim up to 73 per cent of these nights (i.e. 265 total nights available out of 365 total nights in a year).

The second and more contentious change is a new minimum investment return that a bach must achieve before an owner can claim excess deductions (the loss from the bach) against other income.

Under the proposed law, a bach owner must earn 2 per cent or more of the value of the asset before they can claim expenses against other income. So if your bach is worth $300,000 then you need to earn income of $6000 or more before you can claim excess deductions against your main income.

The tricky bit here is working out what a bach (or any other income-earning asset) is worth. After the haemorrhaging of real world property values in the last few years, the market value of a bach is often well below the property's Rating Value (RV). And it is the RV (or acquisition cost) that will be used for this calculation.

The real targets for the changes aren't so much targeting bach owners as the IRD doling out justice to owners of super-yachts, colossal motor homes and luxury aircraft. Historically, this lot have been able to take the mickey, claiming up to 99 per cent of the costs of owning such playthings against their overall income, which seems pretty dubious.

However, it would be a shame if, in trying to nobble the fat cats, the proposed changes also knackered the Kiwi dream of bach ownership.

If you own a holiday house or would like to one day, then these changes are going to impact on you, and you'd be a mug not to express your opinion. The bill is now with the finance and expenditure select committee with the final report due on May 29 next year.

You can have your say at http://www.parliament.nz/en-NZ/PB/SC/MakeSub/.

- Mike "MOD" O'Donnell is head of operations for Trade Me (which owns holidayhouses.co.nz), a professional director and author. MOD's favourite baches are at the mouth of the Rangitata River in South Canterbury when the salmon are running.

- BusinessDay.co.nz

Special offers

Featured Promotions

Sponsored Content