Bach tax concerns addressed
Inland Revenue has offered some Christmas tax relief to some of New Zealand's 15,000 or so bach owners.
Some family baches have been inadvertently caught in the GST net since April last year.
Of particular concern were sole traders who also rented out their family bach for short-term accommodation, who were required to return a portion of the sale price as GST to IRD.
Under the current GST rules introduced in April last year, bach owners who rent out their family bach for short-term accommodation are required to return a portion of the sale price as GST to IRD.
The NZ Institute of Chartered Accountants raised concerns the effects of the 2011 changes were unintended.
And the IRD has responded with a pragmatic solution, releasing an Officials' Issues Paper yesterday on GST remedial issues which suggests giving people the option to take the bach out of their taxable activity.
The option would apply where the supplies relating to the bach are under $60,000 per year.
"We consider the proposals to be a good solution," said NZICA acting tax general manager Jolayne Trim.
"They'll correct the over- reach of the 2011 changes and it will allow sole traders the ability to opt out of the GST rules with regard to their bach, if it was never intended to be included."
It is hoped that the changes will be legislated for next year.
But BusinessDay columnist Michael O'Donnell has also warned about draft legislation that could possibly cap the growth of bach numbers.
One of the benefits of bach ownership has been the ability to rent out your property when you're not using it, and enjoy both the income and ability to claim tax deductions.
However, the Taxation (Livestock Valuation, Assets Expenditure and Remedial Matters) Bill, first flagged in this year's Budget, 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.
O'Donnell said the current situation around claiming costs on holiday homes is pretty fluid with IRD guidelines suggesting 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 that will have an impact is a new formula 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.
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. The bill is now with the Finance and Expenditure select committee with the final report due 29 May 2013. You can have your say at http://www.parliament.nz/en-NZ/PB/SC/MakeSub/.