Goods & services tax
Properties used to provide short-term accommodation can potentially become part of the GST system with one of the key consequences being that future capital gains on a property may become subject to GST.
The supply of short-term accommodation is generally treated as a taxable supply for GST purposes. Registration for GST is compulsory where the gross value of taxable supplies exceeds $60,000 in any 12 month period. People with a sought after property or a number of properties appear to be regularly crossing this threshold, without appreciating the implication. Specifically, that 3/23rds of the rental income could be claimed by the tax man whether or not the tenants have paid GST on the accommodation.
Once registered, GST must be accounted for on all taxable supplies. However, GST can be claimed (in whole or in part) on costs associated with the supply of short-term accommodation.
Second hand goods claim
Once in the GST net, a taxpayer can generally recoup (either immediately or over time) the GST implicit in the purchase price of the property. The GST rules provide a specific mechanism for calculating how much GST can be recouped immediately or in each return.
Ownership structure and GST
Where properties are held in investment vehicles such as companies and trusts 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 private rental being paid to Inland Revenue. Restrictions on the ability to recover GST apply to properties owned by individuals that are used for both private and business purposes.
Accounting for GST on the property on sale
Where the provider of short-term accommodation is registered for GST (or required to be registered for GST), GST consequences will arise on the eventual sale of the property or on GST deregistration. Depending on the facts, the provider of that accommodation is required to account to Inland Revenue for some or all of the sale proceeds from the property. As noted, this can result in GST being paid on amounts including the value of capital gains.
Under New Zealand law, rental income sourced in New Zealand is subject to income tax, regardless of the tax residency of the taxpayer. Rental income, both short and long term, is sourced in New Zealand if the property is located in New Zealand.
Expenses incurred in deriving rental income are deductible for tax purposes. However, if the property is used for both rental and private use, the available deductions can be subject to apportionment under the “mixed use asset” rules. Private use includes the use of the property by an associated person such as a family member, even if they pay for it. If expenses are subject to the mixed use asset rules this means a proportion of expenses such as rates, insurance, interest and management fees are nondeductible. This mixed use asset rule applies to most investment vehicles, including partnerships, look-through companies and trusts.
Taxpayers who have a tax liability (referred to as Residual Income Tax) of $2,500 or more in the prior year will have a provisional tax liability for the current period. In some cases interest (currently at 8.22%) and penalties apply if income tax is unpaid by the tax instalment due dates.
Technology is a double-edged sword. Data relating to short-stay rentals is readily available to Inland Revenue. It pays to ensure those activities are managed professionally in all respects including tax.
If you require any assistance or additional information, please contact your local Staples Rodway tax advisor.