Professional Skipper Magazine from VIP Publications

TAX MAN COMETH BEWARE, THE BY MICHAEL PIGNÉGUY BY MICHAEL PIGNÉGUY J ust in case you think you aren't paying enough taxes and fees to run your small charter boat business, the government has come up with yet another scheme. It may be just enough to make you consider opting out of the system and becoming a pirate operator. enough ter boat with yet to make becoming Unless your boat is used more than 62 days a year you will lose your tax deductibility status for it. The proposed new "mixed use asset tax" is obviously designed to catch those who have their boats registered as a business in order to gain tax-deductible expenses, and quite rightly so, as they are just bludgers on society. ys a year you The proposed signed to catch business in order ightly so, as they The problem is this proposed tax is quite likely to catch bona fide charter boat operators who rely on the incomely on the income gained from charters, even though the boat's income may only be part of their total income, albeit an essential part. The Minister of Revenue, Peter Dunne, says having a, says having a holiday home or a boat that is not used commercially for more than 62 days per year, but where the owner is able to claim full tax deductions for all expenses to do with its upkeep, is "unfair, particularly if the owner holds the asset primarily for private enjoyment". te likely to catch oat' an essential part. ommercially for e owner is able es to do with its holds the asset Agreed, but how is the Inland Revenue Department going to sort out the wheat from the chafe without some horribly complex regulations? ue Department without some The suggested new tax rules apply to assets that: • are used for both private and income-earning purposes • have cost $50,000 or more (except land, where these rules apply no matter what the cost) • are unused for at least two months of the year, and • are rented (or chartered) on a short-term basis. The suggested new rules will apply to assets held by partnerships, trusts, close companies, qualifying companies and look-through companies. Why? The Minister of Finance, Bill English, says he is looking to make the tax system fairer, "by tightening the rules around property investment, aligning the top personal and the trustees tax rates, and by ensuring fairness in social assistance programmes. "The 2010 Budget had a strong focus on fairness and integrity of the tax system. Today's announcement continues that focus," English said. We can only hope the politicians will lead by example. The discussion paper put out by the government in August called for submissions by the end of September, which was not a lot of time to deal with this complex subject. The document suggested two options be considered to prescribe the level of deductions owners of mixed use assets could claim. The "two-outcome option" distinguishes between asset owners who can claim all expenditure for unused time and those who can claim none. For an owner to claim all expenditure for unused time, the following criteria must be met: • the asset must be used to earn income for 62 days or more a year • the asset must be marketed as available for rental in a realistic way for the entire period in which it is reasonable to rent it out, and to rent it out, and • private use must be less than 15 percent of earning income use. The "three-outcome option" distinguishes between owners who can claim all expenditure for unused time, those who can claim for some and those who can claim none. To be able to claim all expenditure, the owner must meet the first two criteria as for option one, and private use must be lesstwo criteria as fo than 10 percent of earning income use.than 10 percen This option private use must be less The "three-outcom who can claim all can claim for some able to claim all ex This option offers little difference to the first option, but if the first two criteria are met with private use time exceeding 10 percent of income-earning use, atime exceedin proportion of expenditure attributable to the unused period will be deductible. but if the firs proportion of The IRD says, "both options attempt to draw objective boundaries between those asset owners who are likely to have mainly an income-earning objective, and those whose main objective is to use the asset privately." What kind of assets? The main target initially appears to be the holiday home owner who rents it out occasionally. Further down the list can be found boat and aircraft owners, and yachts working under the management of charter companies are specifically targeted. Although by value alone the holiday home group represents the majority of mixed use assets, the intention is to have the tax system provide the same treatment for all types of mixed use assets. These can also include cars, motorbikes, bicycles, safety equipment, building equipment and camping gear. It will have to be a very complex set of regulations to cover all mixed use asset possibilities. period will be The IRD says boundaries betwee have mainly an inc main objective is t What kind of as be the holiday ho Further down th owners, and yac charter compan Although by represents the m is to have the tax Even with no charters booked, the boat has to be kept in top condition at all times, as • a potential client may come at any time to view the boat, and • it is a requirement of the safe ship management company in order to retain her survey certificate. Of course, there is never any guarantee of a charter, but the expense of maintaining the boat is always there. If the proposed tax regulation comes into effect and a boat is chartered for less than 62 days a year, there will be no tax benefits for the owners of these boats. For many it will mean there will be no point wearing the cost of keeping their vessel in survey, and opting out of the system to become a pirate operator may start to look attractive. As we have seen over the years, there is little risk to someone running a charter boat illegally, so this may become the preferred choice for those whose commercial days do not meet the required minimum. The charter boat industry is an essential component of both local andv international tourism. Charter boat operators must be viable enough to be able to maintain their boats in top condition to retain their survey certificates. The last thing this industry needs, especially at this time of increasing economic hardship, is more complex regulations and paperwork, and the distinct possibility of a reduction of net income. See http://taxpolicy.ird.govt.nz/publications/year/2011 January/February 2012 Professional Skipper 59

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