New mixed use assets rules have come into effect for Income Tax and Goods and Services Tax (“GST”) purposes.

Who do the new rules apply to?

The rules apply to land, (including improvements), boats, and aircraft. The general rules apply to a natural person, a trustee, and a close company. A close company is a company where there are 5 or fewer natural persons or trustees, the total of whose voting or market value interests in the company is more than 50% (treating all natural persons or trustees associated at the time as 1 natural person or trustee).

The rules apply when the asset in question is used by the person in the income year:
• Partly to derive income, and
• Partly for private use, and

• Must not be in use for at least 62 days in the income year, or when the asset is used only on working days for at least 62 working days in the income year.

Previously, where an asset was available for business use (and actively marketed as such) but not used, the period of inactivity was treated as business use. Only when the asset was actually used privately was an adjustment required. For many significant assets, such as land, boats and aircraft, the amount of “business” use may have been negligible yet because it was “available” for business use, the private use adjustments were insignificant.

The new rules now focus on actual income earning use rather than availability for use. The main purpose of the new rules is to more fairly apportion costs incurred in relation to assets where the use of the assets is split between business and private use.

Motor vehicles are specifically excluded from the application of the mixed use assets rules. Mixed use of motor vehicles will continue to be dealt with through the FBT regime, apportioned expenses or reimbursement as each case warrants. 

When do the rules apply from?

For income tax, the rules have effect from 1 April 2013 for land and improvements, and 1 April 2014 for boats and aircraft. For GST, where the mixed use asset is land or improvements, the rules apply from 17 July 2013. For boats and aircraft, the rules apply from 1 April 2014.

What is the impact of the rules?

Once the asset is subject to the rules, the rules limit the deduction that is available for income tax purposes for all mixed use expenses incurred in relation to the asset.

The amount of GST that can be claimed on the purchase of the asset and the expenses will also be limited.

Example 1

Graham owns a holiday home that is rented out for short-term stays but is also used by him and his family for nine weeks of the year in total (usually on weekends but also over the school holidays). He has rented the home out for a total of 10 weeks of the year. The rest of the time the house is vacant, but is available for rent. 

The mixed use assets rules will apply to Graham. It does not matter that the home may have been available for business use during the remaining 232 days. It was not actually used during that time.

Example 2

Graham determines that he has incurred total expenditure of $50,000 throughout the income year in relation to the property. Of that expenditure, $15,000 relates specifically to the period of use by people renting it, and $5,000 relates to the period of use by Graham and his family. The remaining $30,000 of expenditure, being interest, rates and insurance relates to a combination of business use, private use and the period when the property is not being used. Therefore, apportionment must be undertaken.

Adopting the relevant formula, the following result is obtained:

$30,000 x 70/(70 + 63) = $15,789

The deduction that Graham will be allowed for income tax will be $15,000 + $15,789 = $30,789. The remaining $19,211 is non-deductible.  The deduction may be further reduced in some circumstances. 

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