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ANOTHER BREEDING OPPORTUNITY FOR PIRATES! Proposed new tax rules for Mixed Use Assets BY MICHAEL PIGN��GUY T he proposed new tax rules for Mixed Use Assets as outlined by the Revenue Minister Peter Dunne in the November/December 2012 issue of Professional Skipper, is yet another example of how some people who rise to high office in government, lose touch with reality over time, and of the rest of us who just manage to make a living running small businesses. It would seem that these new tax rules have been dreamt up because the government needs to gouge yet more tax revenue and they feel that some of the members of the charter boat industry have been getting away with something they are not entitled to. (Like some MP���s expenses maybe?) On the face of it, these new rules can appear to be quite reasonable, as we all know of people and companies with large expensive boats in survey that are not fully engaged in charter work, that are used mainly for private purposes. These businesses have been claiming full tax deductibility for all their boat���s expenses for years. Clearly this is not right. But the vast majority of charter boats are owner-operated, with many of them having to rely on other income to support their boat and lifestyle, and others like myself, whose boats are in a management scheme that markets and charters the boat for us. All charter boats, no matter how frequently they are used, have to be kept in top condition for 365 days a year. Even though many charter boats are fully marketed they can be out for as little as 20-40 days, depending on the summer weather over the Christmas and January summer holidays. So with the cost of the berth, maintenance, repairs, surveys and up to 60 percent commission, the overall cost of having a boat available for charter and tourism, can barely, if at all, be covered. The new rule coming into effect April 1, 2013 says that survey costs are fully deductable. But however, the rules go on to say, ���these costs cannot exceed what would normally be considered reasonable to meet these requirements, nor will they be fully deductable if the owner would have incurred the cost anyway. i.e. If an owner of a boat purchases equipment required by regulation in order for the boat to be chartered, and the items purchased are of a higher quality than required under the regulations (and therefore more expensive), the owner can claim full deduction for the amount that is reasonable to meet the requirement for the equipment. The additional cost would be apportioned���. That���s very interesting. How is an accountant in Wellington going to decide what is a reasonable cost for any required equipment that we have to buy? And are they encouraging us to ���buy cheap���? Will we have to put quotes to the IRD for any major equipment purchase that we have to make? The rule also goes on to say that ���Expenditure that is fully deductable does not include expenditure on repairs and maintenance���. So who dreamt that little gem up? As I read the rule, you have to use your ���asset��� in excess of 62 days a year to make it eligible for total tax deductibility. If used commercially for less than that time any ���private use��� is used in the formula to apportion what amount of expenditure may be tax deductable. This is clearly aimed at small businesses, that are struggling in the present economy move to stay afloat. Just in case you thought you could boost your income earning days by chartering out to friends and family at ���mates��� rates���, they have thought of that one too, as any charter must be at ���market value���. But all charter boats that I know of have seasonal rates and are available at times at ���special discount��� rates, just like any other tourism business. That���s how the market works ��� supply and demand! The formula for tax apportionment is: Expenditure x Income Earning Days IED + Private Days So, for example if you spent a total of $20,000 (survey, repairs, maintenance, berthage, insurance) on your boat, she was chartered for 60 days, but you only managed 12 days private use, Mixed-Use Asset Tax is yet another example of this government using a sledgehammer to rectify what is relatively a small problem. only $16,666 would be eligible for tax deductibility. The more private use, the less that amount gets. No private use wins you full tax deductibility. The unit of measurement (i.e. days, nights, hours) that the above formula is worked out with should be the one that ���achieves the most appropriate apportionment of expenditure���. Good luck if you do all three at various times! So what with the IRD trying hard to reduce our income, and with the coming increase in survey costs with the impending MOSS system, I can only see that many smaller charter boat operators will say ���stuff it!���, opt out of the system, go for cash jobs, or drop out completely with a loss to tourism. But, if they do fly a flag, there will be an increase in the sightings of the pirate flag ��� of that we can be assured! The Mixed-Use Asset Tax is yet another example of this government using a sledgehammer to rectify what is relatively a small problem. What they are lacking is the ability to research small businesses and take note of their feedback, and a sense of how small businesses, like charter boats, really work. To be further confused, check out: http://taxpolicy.ird.govt.nz/publications/2012-commentarylvaerm/apportionment-mixed-use-expenditure Happy sailing! March/April 2013 Professional Skipper 39