AirBNB Short-Term Let

Whilst the provision of residential accommodation in a dwelling is GST exempt, the letting of a property for short-term stays is a taxable activity for GST. GST registration is not compulsory provided the taxable supplies fall below $60,000 which often means registration is a choice. Whilst claiming GST on a property acquisition may seem like a great option, this means that the subsequent sale of the property will be subject to GST which could be substantially higher than the amount claimed if the property has appreciated.

The rents charged to guests will also be subject to GST which in most cases is a cost the owner will need to absorb rather than on-charge to guests.

When considering the compulsory GST registration threshold, realise that the $60,000 is entity specific not property specific. Consider this example.

John has owned a bach for 20 years in his trust. He earns $50,000 renting it to holiday makers. During the 20 years it has increased in value by more than $1 million. John’s trust is not GST registered – the income from the bach is under $60,000. John buys a carpark which earns $15,000 pa and puts this in trust as well. John keeps the trust unregistered because the rent from the carpark is under $15,000. John’s accountant delivers the bad news that because the aggregate rent from the bach and the carpark is over $60,000 the trust must GST register. John can only recover GST on the cost of the bach but has to accept that when he sells it, GST will apply to the full sale price including the capital gain over the 20 years.

Second-Hand Good Claims

Developments for resale are taxable and subject to GST. When the use of a property is changed to development it is often suggested that the land be restructured into development companies to protect existing capital gains and isolate commercial risks. There is a GST downside though. When introducing land from an unregistered person to a registered person there is generally the opportunity to claim a 15% second-hand good credit on the purchase, but this opportunity exists only where land is acquired from an arm’s length person. Where land is acquired from an associated party the GST claim is limited to the GST originally paid – usually zero.

Compulsory Zero Rating

All NZ land transactions are subject to compulsory zero GST rating when three criteria are met:

1. both parties are registered

2. the purchaser undertakes to use the land in a taxable activity

3. the purchaser undertakes that the land will not be their principal place of residence.

If you are a new property developer and are negotiating a contract that is “GST inclusive” be wary, if the conditions for compulsory zero rating are met, the GST is included at the rate of zero, not 15%. No refund is available as it might have been if the vendor was unregistered. If you don’t know the vendor’s GST status, don’t make an offer!

Change-Of-Use Adjustments

If an investor changes the use of a property from exempt to taxable, by doing a commercial alteration or embarking on a property development the GST claim can no longer be made in a lump sum on the change of use. Instead, the claim must be made in the March adjustment period in the proportion of the time the property has been in the taxable activity versus the exempt activity.

Changing From Commercial To Residential

If a building is converted from a GST taxable commercial use into a GST exempt residential use this change in use triggers the requirement to account for GST. If the entities’ GST taxable activity is finished as a result of this GST is payable on the market value of the property. If however the entity has an ongoing alternative taxable activity that enables it to remain registered, GST is payable on the cost of the property rather than its market value.

As always, seek professional tax advice before undertaking land transactions.

Mark and his team specialise in advising on property-related transactions, valuation and restructure services, and tax planning. Withers Tsang & Co Phone 09 376 8860, www.wt.co.nz