Each month the Inland Revenue issues a publication called the ‘Tax Information Bulletin’. These ‘TIBs’ are often 100 or more pages and hardly ripping page-turners, but for tax accountants they’re eagerly awaited and especially useful.
The July issue contains an Interpretation Statement on the GST treatment of short-stay accommodation. For anyone thinking about letting out a room or a house on Airbnb or similar websites it’s worth being across this.
A ‘dwelling’ vs ‘short-stay accommodation’
A room or property advertised on the likes of Airbnb is what’s known in tax circles as ‘short-stay accommodation’. This differs from letting a residential ‘dwelling’, which is a longer-term lease more like a landlord and tenant arrangement.
When letting a ‘dwelling’, there is no choice when it comes to GST; it is not subject to GST. This means the owner of the property does not register for GST, does not pay GST and can not claim GST on inputs.
When letting ‘short-stay accommodation’, there often is indeed a choice of registering for GST. Provided there is a ‘taxable activity’, which means that there is some continuity and regularity to the letting, you can register for GST. In fact, if the property is generating more than $60,000 per year, there is no option, it must be registered for GST.
To register or not?
The decision comes for those with ‘short-stay accommodation’ who will generate less than $60,000 per year. In practice this is likely to be most people who have a holiday home or a spare room they let out from time to time.
The benefit of registering for GST is to be able to claim the GST component of the purchase price, which seems appealing on the face of it, but it’s worth looking further ahead than this.
Here’s an example of why. Let’s imagine a couple in their 50s living in Auckland who decide to buy a house in Wanaka with the plan of letting it out on Airbnb for ‘short-stay accommodation’ for 10 years before shifting there to retire. If they register for GST and pay $800,000 for the house, they claim a GST refund of about $104,000. So far so good they think.
However, when it comes time to retire and shift to live in the house, they will be changing the use of the property and a ‘deemed disposal’ will occur. Essentially the property must be de-registered from the GST regime and the couple will need to pay the GST on the current market value of the property. If the property is now worth $1.2M, they’ll be paying GST of about $156,000. Unless they’ve budgeted for this GST bill it’s likely to be pretty unwelcome, especially as there are no actual sale proceeds to fund it.
What to do?
The main message is to be careful before rushing to register your Airbnb for GST and to look well ahead. There are several other aspects to the GST registration decision, and the concept of ‘mixed use’ is another can of complications. If you’re considering a purchase like this and are unsure of the tax aspects, feel free to get in touch with me at email@example.com
Disclaimer – This information is generic and not intended to constitute tax advice.