No tax holiday for short term rental accommodation
Tax Alert - February 2017
By Conor Gates
With the advent of online accommodation marketplace services such as AirBNB, Book-a-bach, and similar holiday home rental sites, it has never been easier to turn a spare room, a holiday home or any other usable space into some easy cash.
More and more New Zealanders are making the most of the new accommodation craze and it is easy to see why when the hassle of advertising, managing bookings and collecting payment are provided through a third party platform. However, many people are using these services without consideration of the potential tax implications which can transform a little extra income on the side into an unexpected tax bill.
We have set out some of the issues below, including a few traps for the unwary that might arise when making property available for use as short term accommodation.
The basics – calculating and paying income tax
New Zealand’s tax laws require that income earned in a business which is carried on for profit is subject to tax. Income earned by providing short term accommodation through a peer-to-peer service is no exception to the rule.
A taxpayer may deduct the costs incurred from operating the short term accommodation with deductions determined on a reasonable basis to reflect the costs actually attributable to the activity, particularly where the expenses have both private and business elements (e.g. insurance, interest and rates).
Taxpayers may also fall within the provisional tax rules if their tax liability in a prior year exceeds $2,500. Provisional tax requires a taxpayer to make advance payments of tax in expectation of their future tax liabilities.
The less obvious – the mixed use asset rules
The available deductions against the income can be greatly affected by the mixed use asset rules which apply in scenarios where a property is partly used in a year to derive income, is partly used for the owners (or associated persons) personal enjoyment and is not used at all for a period.
The mixed use asset rules alter the apportionment of expenses between business and personal use and can have a material impact on the calculation of taxable income. To the extent that expenses are not directly attributable to providing the short term accommodation (e.g. rates, insurance and interest) the available deductions are decreased based on proportionate business and private use.
The mixed use asset rules apply to properties owned by individuals, partnerships, look-through companies, trusts and other close companies and therefore capture the most common investment or asset protection vehicles used in New Zealand.
The spanner in the works – short term accommodation and the GST rules
While it may not be apparent to many, providing short term accommodation is a taxable supply for New Zealand GST purposes. Taxpayers need to be aware of the potential impact of falling into the GST net because once they are caught there is no escape.
The whole spectrum of GST issues relating to short term accommodation are greater than can be put in this article so we have listed some of the most common issues below.
The GST issues start with the question of GST registration which can either occur voluntarily or otherwise is required if taxable supplies exceed (or are expected to exceed) $60,000 in any 12 month period. While this seems a lot, this threshold can easily be exceeded in tourist hotspots. For voluntary registrations in an accommodation context it is often necessary to provide a comprehensive business plan to Inland Revenue.
Returning GST on rent received and commissions paid
Commonly taxpayers will receive a net payment from the provider for the rent charged less any commission or other expenses that the provider is entitled to withhold. For New Zealand GST purposes the gross rent must be returned as a taxable supply and any costs subject to GST must be included as a cost in making that taxable supply – the net amount cannot simply be included in the GST return.
Making second hand goods claims for costs incurred in the past
Once in the GST net, generally a taxpayer can recoup (over time) the GST costs paid when the property was acquired. The GST rules provide a specific mechanism for calculating how much GST can be recouped with each return.
Accounting for GST on the property at deregistration or on sale
Potentially, the greatest impact of falling into the GST net is that any eventual sale of the property (or deemed disposal on deregistration) is also subject to GST. As a result, 15% of the sale price of the property must be returned to Inland Revenue (except where the sale occurs between two GST registered parties and the property is going to continue to be used for making taxable supplies). This effectively creates a tax on any capital gain while the property was owned and possibly can end up costing the taxpayer more in GST than would have been made in profits from short term accommodation.
Ownership structure and GST
Where properties are held in family trusts, companies or other investment vehicles and are used for both short term accommodation and private use, there may be requirements to charge a deemed market rental for the private use, with GST on the deemed rental being paid to Inland Revenue.
Warning - Inland Revenue and local government bodies are paying attention
In recent years, Inland Revenue has been focusing on taxing New Zealand’s black economy which is made up in part by taxpayers providing short term accommodation. However, unlike a plumber’s cash job or handshake agreements between friends, using an online platform to arrange short term accommodation generates readily accessible electronic records.
Inland Revenue has wide information gathering powers and the ability to request information from online platforms. Inland Revenue can use this information to quickly identify who is providing short term accommodation and request evidence that income has been declared in a tax return and taxes paid.
Similarly with the recent requirement for IRD numbers to be associated with property transactions it is now much easier for Inland Revenue to identify that GST should be paid on the sale of a property.
Local governments are also focused on short term accommodation being provided. Under local council regulations a property used for short term accommodation is generally considered to be a commercial property which may affect rates charges and result in other administrative requirements such as consents to operate. Taxpayers should also consider other contracts held if they are providing short term accommodation to ensure that items such as insurance over the property remains valid.
Providing short term accommodation potentially exposes taxpayers to a variety of different New Zealand tax and other issues that should be considered by hosts when making property available to rent. We recommend potential or current hosts seek tax advice on their situation.
If you require any additional information about this, please contact your usual Deloitte advisor.
February 2017 Tax Alert contents