Small Business: Bach, boat tax changes explained

BDO tax partner Iain Craig. Photo / supplied

Last week's Budget saw a tightening of tax rules for holiday homes, boats and planes. Iain Craig, tax partner at BDO explains the changes.

Rod Drury of software company, Xero has long eschewed the myth of the entrepreneurial Kiwi settling for success once they have managed to acquire the famous three B's of a boat, a bach and a well known brand of car. Instead he believes many Kiwi entrepreneurs work hard to pursue the better mantra of the four B's - Building a Billion Dollar Business from the Bach.

The Budget 2012 includes changes to the basis of deductions for costs incurred in owning and using holiday homes where the asset is used for both personal use and commercial use.

The proposal is to limit deductions to a ratio which matches the private use to the commercial use, excluding periods where the asset is available but unused to be excluded from the ratio calculation.

For example where the holiday home is used personally for 30 days a year and rented out for 30 days a year, the deduction will be limited to 50 per cent whereas previously the deduction may have been higher by including the remainder of the year in the denominator.

The matching between personal and commercial use is a practical measure which shares the burden of the cost of the assets between the two uses where the asset is not being used but may be said to be available for both personal and commercial use.

The proposals also apply to other mixed use assets such as boats, aircraft and for those in the South Island "the crib". Specific details are yet to be released as to how the rules will be enacted but any attempt to structure around the rules may well fall foul of the "parliamentary intention" doctrine developed in recent tax-avoidance cases. Parliament's intention is likely to be clear. The deductions are to be limited.

Whether this will prevent growing entrepreneurs from building a billion dollar business from the bach will remain to be seen.