How will a CGT affect your lifestyle block, Airbnb or home office?
Tax Alert - March 2019
By Emma Marr
Since the Tax Working Group (TWG) released their final Report on 21 February 2019, there has been a flood of commentary on the pros and cons of a capital gains tax (CGT). Understandably the commentary has been at a policy level, rather than detailed debate about how the CGT would work.
Although it is well understood that the family home would not generally be subject to a CGT, there is some detail around this that is probably not as well understood. We won’t know until April 2019 which recommendations from the final report the Government will be adopting, but understanding more about the proposals would help create a more fully informed debate about the effect of a CGT in New Zealand.
We’ll cover a couple of the issues affecting family homes below. As always, if you want to discuss this or any other aspect of the TWG Report in more detail, contact your usual Deloitte advisor. You can also read our initial analysis of the Report, and refer to our useful infographic.
What is an ‘excluded home’?
To go back to basics, the majority of the TWG recommended that there be a comprehensive CGT that applies to most assets. The main exemption to this would be the family home – the place that a person owns, where they “choose to make their home by reason of family or personal relations or for other domestic or personal reasons”. Every taxpayer could have an excluded home, but a couple would generally only have one excluded home between them, unless special circumstances meant two excluded homes had to be maintained. Otherwise, if a person owns more than one property that they consider is an ‘excluded home’, they would have to choose which one is the excluded home.
If property is owned by a family trust, that property can be an excluded home if a settlor of the trust is living in the property or the property is occupied by a beneficiary of the trust and the beneficiary is irrevocably entitled to the property or the proceeds from the sale of the property as beneficiary income.
Will my lifestyle block be subject to CGT?
The short answer to this is: it depends how big it is. The proposed exemption for the family home only extends to the home, the land under the home, and the land around the house up to the lesser of 4,500m2 or “the amount required for the reasonable occupation and enjoyment of the house”.
The Report includes an example to illustrate how this works. A farmer owns a 100 acre sheep farm, and approximately 4,000m2 of this comprises their house and gardens. The rest is used for the farm. Only the house and the surrounding 4,000m2 would be the excluded home. If the farmer sold their house and farm, the excluded home would be exempt from CGT but the rest of the land would not. A valuation would be used to determine the value of the excluded home.
Conversely, if the gardens surrounding the home exceeded 4,500m2, the additional land above the 4,500m2 allowance would be subject to CGT on sale. Obviously the same principles would apply to smaller lifestyle blocks.
What if the excluded home is used for earning income?
If you are using your excluded home partially as your home and partially for a business (such as a home office, holiday accommodation, flatmates or borders), this will influence whether your excluded home escapes the CGT net. The TWG suggests that the owners of such a property should either:
- Choose to treat the house as an excluded home (if they use at least 50% of it as their home), but have no deductions for any business-related property costs; or
- Take deductions for business related costs, but also pay CGT if they sell the house, on that part of the house that was used for running a business.
The Report includes some examples to illustrate how this would work, we replicate these below.
“Home office. Dinesh owns a five-bedroom house that he uses as a residence for himself and his family. He also runs a consulting business out of one room in his house. As the area of the house used for income-earning purposes is minor and the house is more than 50% used as a residence, Dinesh can choose that the entire property will be an excluded home. However, if Dinesh chooses this option, he will not be entitled to claim any deductions for expenses relating to the property against the income from his consulting business”
“Airbnb. Mary purchases a house, which she occupies as her main home. The house has two living areas, one of which has a small kitchenette. Mary decides to advertise the use of one of the bedrooms and the second living area with the small kitchenette (approximately 33% of the total floor area of her house) on Airbnb. Mary has paying guests staying in her house for an average of 50 days each year. Mary uses those areas for her own private use at other times of the year.
“Both the area used (33% of the floor area) and time the area was used for income-earning purposes (an average of 50 days a year) amount to less than 50% income-earning use of the property. Therefore, Mary can choose that the entire property will be an excluded home. However, if Mary chooses this option, she will not be entitled to claim any deductions for the expenses relating to the property against her Airbnb income.”
“Part of a larger building used for private purposes. Ruby owns a five-bedroom property that she uses to run a bed and breakfast business. Ruby uses four of the bedrooms and most of the living areas for the bed and breakfast business. However, Ruby occupies one of the bedrooms and a small living area and bathroom attached to that bedroom, as her residence – approximately 20% of the floor area of the property.
“The 20% of the property used as Ruby’s residence can be treated as an excluded home and Ruby would only have to pay tax on 80% of the gain on sale.”
The same would apply to home owners who have flatmates or borders.
We’re resisting the temptation to read the tea leaves and predict whether either of these proposals will be adopted by the Government. Commenting on the proposals at this stage might be premature, as the Government might reject both ideas. The difficult part, as always, will be in getting the proposals into sensible legislation that can be easily understood and implemented.
March 2019 Tax Alert contents