Bobs Cove Renovation Post # 6 - Short term rental and GST
Given the increase in visitor numbers to the Queenstown area and the relative shortage of quality accommodation for those visitors, it is not surprising to see the proliferation of people renting their properties through websites such as Airbnb. There are, however, issues that need to be thought about, which has made what Stewart has being sharing over the past months so interesting with the transformation of his boxing gym into a building capable of being rented as short-term nightly stay accommodation.
We have learnt that there can be issues at various junctures along the way, such as the requirements of Council both in terms of consent to build, but also to operate the activity. As part of the process, Stewart also had to consider the requirements of another much loved organisation, the IRD. Whether we like it or not, if you are renting your property, the burden of taxation is not far behind.
In its basic form, the rental income that Stewart was going to derive needed to be returned for income tax. Against this, Stewart would be able to claim certain costs associated with that activity. Part of this would be determining what can be claimed with the refurbishment of the garage.
However, what was more significant and complicated in this case, were the GST implications. This was because the property would be rented as nightly accommodation through Airbnb. As a result, it was likely that this would be subject to GST (subject to some exemptions) because it would not be a rental of a residential dwelling (like it would usually be if rented as a long-term rental). Also, by renting the property nightly, Stewart would be providing other services, such as cleaning which again attract GST.
On the income and expenses, GST is similar to income tax. You account and pay GST on the rental income and claim GST on certain costs. However, a wider and more unexpected implication lurks in that if an asset (such as a property) is used in a taxable activity subject to GST then it too becomes subject to GST.
The implication of this can be significant because it can result in your property being subject to GST at a rate of 15% on the sale value. Therefore, if GST applied to the activity operated from Stewart’s property, it is possible that on sale he could lose 15% of the value of that asset to the IRD. That is not to say he couldn’t claim GST on the cost of the property, but you can expect there to be a notable difference between the cost to build and the saleable value in the future.
In a case like Stewart’s, there are a multitude of rules that need to be considered, the most obvious being an apportionment given that not all of the property is being used in the activity. However, this is dependent on how the property is owned. There are also timing issues that become critical given the cash flow implications of 15% on such a significant asset.
In Stewart’s case, a key consideration was the fact that gross rental (before any management fees) of the ownership entity was likely to be less than $60,000 over a 12-month period. As a result, he did not need to register for GST. However, this is something he will need to monitor as rental returns have been high of late given the shortage. Once over $60,000 then he will be deemed to be registered for GST and the implications of that would follow.
As you will have read previously, there are several implications that arise with renting a property on Airbnb. Like Stewart, it is important that you understand the implications before proceeding too far, as the costs of not being aware can be significant and could far outstrip any benefit you thought you may have had.
Written by Daniel Gibbons, Property Tax Specialist, Crowe Horwath
Call Daniel on +64 3 450 1884
Email Daniel at firstname.lastname@example.org
This advice relates to the particular case mentioned and and is otherwise general in nature prepared without taking into account your own personal circumstances. You should seek independent advice before acting on it.