Welcome again to the McLean and Co. Newsletter in which we discuss current taxation and business matters. We trust you find it informative.  

 

We are happy to accept new clients.  We would be happy to assist colleagues and acquaintances as new clients.

 

INDEX

1. IRD Scam Emails

2. Mixed Use Assets

3. Mixed Use Holiday Homes

4. Buying at Mortgagee Sale- Things to Be Aware of

 

IRD SCAM EMAILS

It is noticeable that a few IRD scam emails and also faxes have been doing the rounds lately. These can be quite deceptive as they feature the IRD logo, and sometimes say you have a refund available, or ask you to complete disclosure forms.  Be aware!!!    IRD do not communicate with taxpayers in this fashion.  These are deliberate attempts to use the IRD logo and brand to steal confidential and personal information, and any information given can result in a business or individuals suffering identity and date theft and possible financial loss.  If you receive such emails or faxes destroy them immediately. You can also email phishing@ird.govt.nz to report them to IRD.

 

MIXED USE ASSETS

The Tax Bill containing the new Mixed Use Assets Expenditure rules (“the MUA rules”) received Royal Assent on 17 July 2013 with retrospective effect (1 April 2013 for most).  These rules significantly change the way expenditure is apportioned on so called mixed use assets.  A Mixed Use Asset is one that is - used to derive income, used privately, and not actively used for a significant portion of the income year.  Taxpayers can no longer claim the period an asset is "available for use" but not actually used as relating to income generation resulting in full tax deductibility of costs during that period.  The focus is now squarely on actual use or active use with periods of non-use ignored for the purposes of determining tax deductibility of expenditure.  


MIXED USE HOLIDAY HOMES

From the beginning of the 2013–14 tax year owners of “mixed-use” holiday homes will have to work out their income tax obligations differently. You have a mixed-use holiday home if, during the taxyear, your property is used both for “private use” and“income-earning use”, and it’s also unoccupied for 62 days or more.

What is “private use”?

Private use of your property means:

• use by you or your family, even if rent is paid.

• use by non-associated people if you earn rent at less than 80% of market rates.

What is “income-earning use”?

Income-earning use of your property means use by a non-associated person from which you earn rent at 80%or more of market rates.

Visits for repair work

If you stay in your property to repair damage caused by tenants during “income-earning” days, your stay is also counted among your “income-earning” days.

Exemptions

If your income from income-earning use is less than $4,000 for the year, you can opt to keep the holiday home outside the tax system.  That means your rental activitydoesn’t need to be included in your income tax return. You don’t return any of your income and you can’t claim any of your expenses for the holiday home. You can also choose for your rental activity to remain outside the tax system if:aes for holiday homes

• you make a loss, and

• your gross income from income-earning use is less than 2% of the rateable value of the property.

The above exemptions don’t apply to holiday homes owned by companies.

What income is taxable?

You must pay income tax on rent earned from income earning use. Any rent from private use is exempt from income tax.

What Expenses are deductible?

Expenses from mixed-use holiday homes fall into threecategories:

1. Fully deductible. You can claim 100% of any expense which relates solely to the income-earninguse of the holiday home.   Examples: Costs of advertising for tenants, costs of repairing damage caused by tenants.

2. Not deductible. You can’t claim any expenses relating to the private use of the holiday home. Example: Costs of a boat and quad bike stored in a locked garage and unavailable to the non-associated people renting the holiday home.

3. Apportioned. If an expense relates to both income earning use and private use, you need to apportion it using this formula:

Apportionment formula:

Expense × income earning days divided by  (income earning days + private use days)

Examples: mortgage interest, rates, insurance, repairs for general wear and tear.

Carry forward of losses

If you make a loss from your mixed-use holiday home, and your gross income from income-earning use is less than 2% of the rateable value of the property, you can’t claim the loss in the current year. You’ll have to carry forward the loss to offset against income from your holiday home in a future tax year.

Record keeping

You kneed to keep records so you can work out your income tax obligations at the end of the tax year. Your records should show: private-use days, income-earning days, the expenses you paid, and the name of each tenant together with their relationship to you and the rent they paid.

Example of calculations required for a mixed-use holiday home

Peter owns a holiday home in Waihi. During the 2013–14 tax year, the home was used by Peter and his family (42 days) and members of the public (80 days). For the rest of the year (243 days), the home was unoccupied. Peter’s uncle wanted to help out with costs, so he paid rent of $3,150. Rental income from members of the public came to $12,000.

Expenses were: Advertising for tenants $,500, General repairs and maintenance $,750, Repairing window (broken by member of the public) $,150, Cleaning septic tank $,400, Insurance (home and contents) $,800, Lawn-mowing contractor $,250, Fishing licences (for the family) $,250, Rates $1,500, Mortgage interest $,800, Total expenses for the year $5,400

The calculations

Peter’s property is a mixed-use holiday home because it was used for private use and income-earning use and it

was unoccupied for 62 days or more. His gross rental income is $12,000. The $3,150 received from his uncle is exempt from income tax.

Expenses for the home fall into all three categories.

• Fully deductible (expenses relate to income-earning use):

Advertising for tenants $,500,  Repairing window (broken by member of the public) $,150, total $650

• Not deductible (expenses relate to private use):

Fishing licences (for the family) $,250, 

• Apportioned (expenses relate to both income-earning and private use)

General repairs and maintenance $,750, Cleaning septic tank $,400, Insurance (home and contents) $,800, Lawn-mowing contractor $,250, Rates $1,500, Mortgage interest $,800- total $4500

Peter applies the apportionment formula to the apportioned expenses:

Expense × income-earning daysdivided by (income earning days plus private use days)

= $4,500 × 80/ 80 + 42

= $2,950.82

This means Peter’s expense claim totals $3,600.82 (the fully deductible expenses of $650.00 plus the

apportioned expenses of $2,950.82).

His taxable income from his property is:

Gross income $ 12,000.00 less Expenses $ 3,600.82 Taxable income $ 8,399.18

Examples of Private Use/ Income Earning Use

In terms of meeting the statutory test, if the holiday house has mixed uses, the ability to deduct expenditure comes down to a case-by-case assessment that weighs all the evidence.  Objective evidence is required that the holiday house is genuinely available for rent and that there is a real prospect of occupancy and rental income being earned.  This needs to be considered separately in relation to each year (that is, just because a holiday house has been genuinely available for rent and sufficiently marketed and/or actually rented in one income year, does not mean a deduction will be automatically allowed in subsequent income years).

Example 1

A holiday house in the Coromandel has earned significant rental income after active marketing at competitive rates in newspapers and on internet sites for almost all of the year.  However, the owner's family uses the holiday house for two weeks over the Christmas/New Year period.  Even though, in this case, the holiday house may not be actually rented out for every day of the remaining 50 weeks, provided it is available for rent during those 50 weeks, it is generally possible to deduct expenses for that period (ie, for 50 weeks out of the full year).  Any expenses that are variable in nature (ie incurred when the property is occupied) should be spread on an appropriate basis.

Example 2

A holiday house in Mount Maunganui is used by its owner and her friends and family for most of the year.  However, the holiday house is rented out to a third party for two weeks over the Christmas/New Year period for $3,000.  In this case, the owner may deduct expenses (eg, interest charges, depreciation costs, insurance, and rates) for the proportion of the year that the holiday house was actually rented out (ie, for two weeks out of 52 weeks).  Any expenses that are variable in nature (ie incurred when the property is occupied) should be spread on an appropriate basis.

Example 3

A holiday house in Queenstown is available to be rented for eight weeks a year when it is not being used by the owner.  For four of those weeks it is rented to members of the public for its market rental of $600 per week.  For the remaining four weeks it is rented out to a family friend.  The friend is charged "mates rates" of $350 per week.  In this case, IRD would accept the owner deducting expenses (eg, interest charges, depreciation costs, insurance, and rates) for the proportion of the year that the holiday house was rented to the friend (ie, for four weeks out of 52 weeks) up to a maximum of $1400 (the amount of rent received).  Full deductibility would be allowed for the remaining four weeks that the property is rented out.

Example 4

A holiday house in Papamoa is used by the owner for most of the year.  A market rental for the property would be approximately $450 per week.  The holiday house is made available for use by a family friend for three weeks during summer.  The friend is not charged for staying at the property, but chooses to make a contribution of $200 to the owner towards the cost of power, water, etc for the three weeks.  In this case, the amount received is not income of the owner and, consequently, does not need to be returned to IIRD (nor would any tax return need to be filed - unless the owner otherwise had to file one).  Similarly, no deductions are available to the owner.