Taxing your Airbnb or family bach
Tax Alert - March 2019
By Andrea Scatchard and Emma Faulknor
Many people will have enjoyed a sausage around the BBQ this summer at an Airbnb or family bach and recent tax announcements may have been a hot topic of discussion.
For people with a spare bedroom or empty bach, providing short term accommodation has never been simpler. Hosts can utilise peer-to-peer platforms, such as Airbnb and bookabach, to provide advertising, collect payment and help manage bookings. This ease means taxpayers overlook the tax measures that affect the provision of short term accommodation.
To ensure taxpayers aren’t hit with an unexpected tax bill, Inland Revenue asked taxpayers what issues or questions they wanted addressed. As a result, Inland Revenue has published several documents for consultation on the income tax and GST implications of providing short term accommodation.
Although the documents do not propose significant changes to the current practice, they should help to simplify what can be a confusing area for taxpayers. Accommodation provided by a trust will be addressed by Inland Revenue at a later date.
Income tax issues
The income tax treatment when providing short term accommodation will vary depending on the situation. The income tax documents address the different methods available to calculate taxable income in each situation, such as providing a room in your home, your whole home or holiday home for rent.
Accommodation provided in your home
Generally short term accommodation providers will have the choice of returning income under a new standard cost method or an actual cost method. The standard cost method is intended to reduce the compliance costs of taxpayers.
Standard cost method
Under the proposed standard cost method, the rental income is not taxable provided the income earned is less than the standard cost. To the extent the income earned exceeds the standard cost the amount will be taxable.
The standard cost method will generally only be available to individual hosts, who rent rooms for less than 100 room nights per year and who are not GST registered. The proposed standard costs are $50 per room per night if the host owns the home, or $45 per room per night if the host rents the home. These amounts have been set based on the average cost of owning or renting a home plus the cost of short term accommodation items such as breakfast, linen, cleaning etc.
The standard cost method for boarders will continue to apply to the provision of boarding services. The draft determination will apply from the start of the 2020 year and reduces the set weekly cost to $183 per week for each boarder, although there will no longer be a different rate for the third and subsequent boarders. The standard cost determination for boarders cannot be used for short stay guests, flatmates or tenants.
The standard cost method will be simpler to apply than the actual cost method. Taxpayers who earn income less than the standard cost amount do not have to return the income. However, by using the standard cost method taxpayers will not be able to deduct for any actual expenditure and will be unable to claim any losses from providing the accommodation.
Actual cost method
If taxpayers cannot or do not want to use the standard cost method, for example if their actual costs are higher than $50 per night, the deductions can be based on actual expenditure.
Unlike the standard cost method, the rental income will be treated as taxable. Expenditure that relates only to the rental activity should be 100% deductible. However, expenses that are for both rental and private purposes should be apportioned. Depreciation losses on assets that are also used by tenants should also be apportioned.
The apportionment calculation should take into account the floor area of your house and the number of nights the room or rooms were rented out.
Specific rules apply to holiday homes, as they are frequently left unoccupied. In our experience the rules can be quite complex to apply, so this draft guidance on the different rules is welcomed.
Mixed use assets
The mixed use asset rules apply to taxpayers who provide accommodation on a property that they and short term guests use but that is vacant for more than 62 days in a year, such as the family bach.
The mixed use asset rules factor in the vacancy to the deductions available and taxable income should not include rental receipts from certain family members or when renting to people for less than 80% of the market value rental.
Standard tax rules
If you cannot use the mixed asset rules, the standard tax rules will apply to your property. It is possible for a taxpayer to switch between the rules in different income years where the number of vacant days varies each year.
Under the standard tax rules, all amounts received for accommodation services provided will be taxable. Expenditure will need to be apportioned between private and rental use although expenditure wholly related to renting the property should be fully deductible. Such expenditure could include advertising, cleaning and additional rates and insurance costs incurred because the property is rented out.
Goods and services tax
Unlike the income tax draft items, which are generally quite comprehensive, the GST draft item is remarkably light on detail, to the point where a little knowledge could be dangerous for homeowners. We hope that the more detailed document promised is issued promptly, as without this the current draft item may serve as a useful high level summary, but it provides no real guidance for taxpayers who face some very complex GST issues.
That said, it is useful for the moment to touch on some (but definitely not all) of the common GST issues that are faced in relation to short term accommodation to illustrate the things that homeowners should be considering:
Is the accommodation exempt from GST as residential accommodation (such as a standard residential rental tenancy) or potentially subject to GST (such as short term accommodation, whether in a room or a whole house or bach)?
- Is the nature of the accommodation provision business like and therefore a taxable activity, or is it in fact more like a hobby?
- If subject to GST, is there a need to charge GST? If the property owner is registered for GST already, even if in relation to some other taxable activity, then GST must be charged. If the property owner is not already registered for GST, they must register if the level of taxable supplies exceeds (or is expected to exceed) $60,000 per annum. Voluntary registration is possible even if the level of supplies is under this threshold.
- While it can be attractive to register for GST voluntarily, in order to recover 3/23 of some or all of the purchase price of a property, in the long term this may not be the best decision financially. Upon sale of the property, or deregistration from GST, the homeowner could effectively lose 3/23 of any capital gain on the property.
- If the property is owned in a trust, company or other entity, then “private” use by individuals associated with the owner (such as shareholders, trustees or beneficiaries) is a deemed supply for GST and the market value must be taken into account when assessing the $60,000 threshold. If GST registered, GST must be returned on the market value of these “private” supplies.
- Complicated change of use adjustments can be required if the home is used for both personal and GST taxable purposes.
We note the deadline for consultation on these documents is 22 March 2019. If you wish to provide comment on the consultation documents please contact your usual Deloitte tax advisor before then.
March 2019 Tax Alert contents
- Changes for residential rental owners from 1 April 2019
- Tax is changing - for everyone
- How will a CGT affect your lifestyle block or home office?
- The Commissioner can't have her cake and eat it too...
- Interim digital services tax to be implemented ahead of OECD work
- A Snapshot of Recent Developments