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PROPOSED NEW TAX RULES FOR BOAT OWNERS EXPLAINED FROM THE OFFICE OF REVENUE MINISTER PETER DUNNE T he Government has proposed new tax rules that may affect the amount of deductions some boat owners are able to claim. The owners likely to be affected are those who use their boat to earn income and also use it privately, where the boat costs $50,000 or more, and it is unused for more than 62 days in an income year. A boat that is only chartered out and not used privately by the owner will not be affected. The rules allow owners to claim an amount of tax deductions that reflects the balance between the income earning and private use of the boat. To understand the reason for the new rules it is important to understand one of the core principles of the tax system. Namely, when you incur costs in earning income, that income can be offset by those costs. However, costs cannot offset income if they are private in nature. These costs could include loan interest, mooring fees, and repairs and maintenance expenses. The fact that an asset is used privately as well as to earn income, does not mean that no deductions are available. Current law is not clear as to what proportion of costs can be deducted for tax purposes and some owners have been deducting a very large proportion of those costs. While this may well be in accordance with the strict letter of the law, it is not a fair result when compared with other businesses or people who use assets purely for their own benefit. In a nutshell, the new rules distinguish between costs that are associated with income-earning and those associated with FULL TIME MARINE ENGINEERS WANTED! In this role you will be responsible for the For this role you will need to have: WWW.FULLERS.CO.NZ VIP.S87 24 Professional Skipper November/December 2012 (09) 367 9112. If you wish to apply now, please submit http://careers.fullers.co.nz under private use of the asset, and provide rules to determine what can be claimed. Some costs will be deductible in full. These are costs which are incurred purely to earn income. Examples of these kinds of costs are advertising expenses and Maritime New Zealand survey costs. Other costs which deliver both income-earning and private benefits will be deductible on a proportionate basis. Owners will be required to record both the private and income-earning use of their asset throughout the year. The proportion of general expenses the owner can claim is calculated by dividing the asset's income-earning use by total use (i.e. income-earning use and private use). Purely private expenditure will remain non-deductible. The new rules will also contain measures to help reduce compliance costs and the public will have an opportunity to express their views on the new rules at select committee later this year. The rules are expected to take effect from the beginning of the 2013/14 income year. Key points of the proposed rules apply to: • assets used both privately and to earn income; • assets unused for at least 62 days in an income year; • land or other assets with cost exceeding $50,000. Costs will be divided into three categories: • Costs incurred purely for income earning purposes such as Maritime Survey costs will be deductible in full. • Costs that are purely private will remain non-deductible. • A proportion of the costs associated with both the income- earning and private use of the asset, such as general repairs and maintenance, will be deductible (see below). • The proportion of costs which will be deductible will be calculated as: time used to earn income/total time used. So for example if a boat is hired out for 30 days and used by its owners for 30 days, then 50 percent of costs will be deductible. Where, after applying the above formula a loss arises and, gross income was less than two percent of the cost of the asset or rateable value if land, then: • The loss cannot be offset against other income, but must be carried forward and used against future profits from that asset. Asset owners can treat their asset as outside the tax system (no tax on income and no deductions) if: • Their gross income from the asset is less than $1,000; or • The asset generates a loss. The proposed rules will also apply to assets which are used directly in business, as well as those which are rented out but only where those assets are used privately as well as in business, and are unused for 62 days per year. The proposed rules do not apply to motor vehicles or buildings also used as residences such as home offices, where existing apportionment of expenditure on the basis of space is used. The proposed rules apply to assets held by a range of entities, so individuals, partnerships, trusts and close, companies will all be subject to the proposed rules.