As expected, Budget 2012 will cut the amount of tax deductions available for mixed-use assets such as holiday homes, boats and aircraft.
The Budget confirms tax changes, as signalled earlier this year, to close loopholes that allow costs of holiday homes, boats and even aircraft to be deducted from tax, if they are also rented out for income.
Revenue Minister Peter Dunne said that the allowance was unfair because owners could claim deductions for most of their costs even if the property was mainly for personal use.
“In effect, they are getting a taxpayer subsidy for their private use of the asset,” he said.
These changes are expected to save around $109 million over the next four years.
Changes mean that if a holiday home is rented out for 30 days and the owner uses it for 30 days in a year, just 50% of the costs can be deducted from tax, rather than the current 90%
Hence, the new rules will allow owners to claim deductions only in proportion to the income earned compared to their private use.
Also, as flagged, a loophole allowing farmers to cut their tax bill by switching livestock valuation methods from year to year will be closed.
The measure was announced in March but will now be enshrined in legislation.
Mr Dunne said that the previous rules were too loose and allowed farmers switching from the ‘Herd Scheme’ to the ‘National Standard Cost Scheme’ to receive an ‘unfair tax advantage.’
The change will plug an estimated revenue leakage of $184 million over four years.
Three tax credits are being removed – those the Government says are ‘no longer fit for the purpose for which they were set up.’
These include income under $9880 tax credit, the childcare and housekeeper tax credit and the tax credit for the active income of children, which will be replaced by a limited exemption.
These changes will save approximately $117 million over the next four years. Childcare and housekeeper tax credits were ‘poorly targeted’ according to the Government, with the bottom 30% of households making up just 11% of those claiming the credits.
An extra $78.4 million is being given for audit and compliance of the Inland Revenue Department (IRD), which Government hopes will net it additional $345 million in taxes over four years.
These estimates reflect some confidence among Government and Officials that there are unreported and uncollected tax dollars.
With this additional funding, we can expect IRD’s audit activity to increase further in coming years.
Jayesh Kumar is an Associate (Tax Services) at William Buck (NZ) Limited Chartered Accountants based in Auckland