Complexities of GST | July 2020

By Sarah Kennedy, Hua Lam

With COVID-19 restricting international travel and resulting in a closure of borders, this has impacted short-stay accommodation as many providers of short-stay accommodation were not able to operate as per usual. On top of this, there are GST issues to be considered if for example, a GST-registered provider of short-stay accommodation decides to change the way they operate and what was a short-stay property becomes a long term residential accommodation property.

Earlier this month Inland Revenue released an Interpretation Statement on the GST treatment of short-stay accommodation, which is the final item in a series of guidance on the tax consequences of providing short-stay accommodation through peer-to-peer websites such as Airbnb, Bookabach and Holiday Houses. The statement covers accommodation provided to guests for less than four weeks when on holiday, travelling for business etc. and includes staying in the host’s home as well as separate or detached properties. The statement is 51 pages long so if there is one takeaway from this statement it is that the treatment of short-stay accommodation is complex.

For example, a change from short-stay accommodation to long-stay accommodation requires the taxpayer to repay the input tax credits previously claimed via what can be a really complicated annual change of use adjustment. The statement doesn’t go into much detail in relation to these situations so have a look at our article on this topic.

We recommend reviewing short-stay rental properties to confirm that the historic treatment has been correct and to consider the impact of any possible change of use arising from COVID-19.

In a nutshell, the key aspect of the statement are as follows:

The supply of short-stay accommodation is different to long-term residential rentals. The supply of long-term residential rentals is an exempt supply and is outside the GST net. On the other hand, the supply of short-stay accommodation is not an exempt supply, and therefore is almost certainly subject to GST at 15% if the owner is GST registered.
The statement provides guidance on complex rules in relation to GST adjustments for capital and operating costs of the property. Annual change of use adjustments may be required if the actual use of the property changes from its intended use in any given year. This may become more prevalent in the COVID-19 environment if short-stay accommodation (i.e. taxable) pivots to long-term residential accommodation (i.e. not taxable). Working through these rules, determining the amount of the adjustment and how frequently they need to be made is complex. We recommend that you seek advice prior to changing the use of a property and then get help with your 31 March GST returns each year so that these adjustments are made correctly.
GST registration is compulsory if your short-stay accommodation income exceeds (or is expected to exceed) $60,000 in a 12-month period – you need to add together short-stay rental from all properties held by the entity in considering this threshold.
Whilst it is possible that a provider of short-stay accommodation can voluntarily register for GST if the $60,000 threshold is not met, careful consideration needs to be taken to decide if this is the right decision for you. A downside of registration is that the sale of a property is subject to GST at 15% if it is sold to an unregistered purchaser. Where properties appreciate, the GST output tax on sale may be significantly higher than the GST input tax on purchase and operating expenses. This can impose a real and significant cash cost.
Whether you need to or can register for GST depends whether you have a taxable activity. For most hosts, the crucial question is whether the short-stay accommodation activity is carried on continuously or regularly. Occupancy is a key (but not determining) factor, and regular paying guests will suggest a taxable activity. Renting activity that is intermittent or occasional such as renting a room for a one off sporting event will not be sufficient to establish a taxable activity.
Once registered, a GST-registered person can claim input tax credits on costs that relate to GST-taxable income (e.g. advertising services, linen and toiletries purchased solely for use by guests). However, you need to be very careful about the amount that is claimed as GST can’t be claimed on expenses that relate to the property being used privately or for making exempt supplies of long-term accommodation. The statement provides some guidance as to how you might undertake an apportionment of these costs.
As discussed above, having tenants enter into a residential tenancy agreement on a property you have previously claimed GST on (i.e. the use of the property changes from short-stay to long-term rental) can have some large GST consequences. If multiple properties are held and use of some of these remain short-stay, then change of use adjustments will apply. However, if the taxable activity of supplying short-stay accommodation ceases because the entity holds only one property there is an obligation of notify the Commissioner within 21 days of the activity ceasing. Following this, the GST registration is cancelled and GST is payable on the open market value of the property at the de-registration date less any unclaimed GST input credits.

In summary, you should seek advice before switching the use of your short-stay accommodation if you are GST registered and have previously claimed back input tax credits. For more information please contact your usual Deloitte tax advisor.