The holiday’s over for holiday home tax treatment

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IRD moves to reform the tax treatment of holiday homes will remove a “perverse” tax incentive for people to buy second, holiday homes.

Thursday, August 18th 2011, 4:14PM 2 Comments

by The Landlord

That's the view of PricewaterhouseCoopers (PwC) Tax Partner Geof Nightingale who spoke to Landlords in the wake of an announcement from Revenue Minister Peter Dunne about the release of an Issues Paper examining the tax treatment of mixed-use assets.

The Paper aims to examine the unfairness in the tax treatment of assets such as holiday homes used for both private and income generating purposes.

Dunne said the unfairness arises when owners claim the house is available for rent during significant periods of the year yet remains empty.

"This provides them with the basis for claiming tax deductions for expenses relating to the period the property is empty. Claiming these deductions could be regarded as unfair, particularly if the owner holds the asset primarily for private enjoyment," Dunne said.

Nightingale said there were around 15,000 holiday homes in New Zealand and that the proposed changes were less about chasing revenue and more about creating a fairer tax system.

At present he said the system provided "a perverse tax incentive to get a holiday home."

"There's two issues with this, one is it provides almost a tax incentive to buy a holiday home which is distortionary for economic efficiency, and the second problem is the inequity issue. If you can afford to buy a holiday home and are smart enough to set it up like this, you're getting a bit of a tax break that's not available to your neighbour."

Nightingale said any changes should avoid unnecessary compliance headaches and take the form of defining tests to prove a house is either a fully income producing asset - qualifying for a deduction - or mainly a private asset, only qualifying on days it is rented out.

He also advocated a cut off point for tax consideration.

"If you own a holiday home and you rent it for, say 20 days a year, they just ignore that. There should be some kind of threshold level where if you're earning $15,000 a year just to defray the rates from a few days rental you're out of the system entirely."

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