Commercial Properties and GST
With all that has happened in our world since early this year, many property owners who previously had their properties in an Airbnb or accommodation business are looking to turn these into residential rentals.
From an investment point of view, this certainly makes sense. There is a shortage of rental properties in all areas of NZ and without overseas traveller’s there is an over-supply of accommodation properties, especially in certain tourist hotspots in NZ.
Why wouldn’t you look to have a regular income to offset your holding costs and ensure that you can fund the property?
Unfortunately, it is not quite that simple. This is a very tricky area of tax law both for GST and Income Tax and must be handled correctly to ensure you don’t end up paying out a significant amount of money to IRD.
Firstly, once you have a property rented out for short-term accommodation this becomes, for tax purposes, a commercial property not a residential property. If you were earning over $60k per annum OR if you decided to register for GST then the property will be in the GST net. Sometimes this can happen inadvertently if the property is owned by an entity that has other GST income then your property may have fallen automatically into the GST net.
If you have
- claimed GST on the property
- operated the property through a GST registered entity
- have inadvertently fallen into the GST net
then you will be liable for the GST portion of the property at the time you change it to a long-term rental. The GST will be payable on the market value of the property.
Susan purchased a property for $500,000 in 2010 as a personal home. In 2017 she decided to buy a bigger family home and turn her current home into an Airbnb. It was in a great holiday location and she received over $60k in accommodation income. It would be assumed that she has correctly paid GST on this income. With the lockdown of NZ, she now has zero income from tourists using the property and she decides to let it out as a residential rental. At the time it became a residential rental the market value was now $800,000. She will be liable for the GST on the $800,000 and may be able to claim the GST on the original cost of $500,000 but this is not always the case, so she could be up for a possible payment of $105,000. (If Susan had transferred her family home into a different entity, at the time she changed it to an accommodation property, then she would not be able to claim any GST on the cost of the property).
This is an extremely complex area of law and you must get good advice around any changes to your property status.