Articles by Anthony Lipscombe.
As we close in on summer, I thought it was worth highlighting a tax trap for bach owners who want to get some extra income by renting out the holiday home on Airbnb. Consider the following.
Let us say that 30 years ago your parents formed a trust to buy a holiday home. The holiday home is used exclusively for private purposes for the next 30 years. You spend your childhood holidays there, and eventually take your own children from time to time. Life is getting busier, and you and your siblings still like to get away, but the lure of some additional income through renting the house out via Airbnb when none of the family are using it proves irresistible.
You are aware that short term rental income can be subject to GST, but you do not foresee the annual income from Airbnb exceeding $45,000. This is based on 115 nights of rental occupancy at $400 per night. You are aware that the threshold for compulsory GST registration is $60,000, so you tell Airbnb that you will not be registered for GST. You do not want to register for GST for two reasons. First, it would mean less revenue for you (more on that in a moment). Second, most importantly it would mean that the property is dragged into the GST “net”, meaning you can end up with GST to pay on future sale.
This all goes well to begin with. Airbnb collects the nightly rental of $400. As part of this process Airbnb deducts just over $50 of GST, noting that Airbnb has to charge GST even if the owner is not registered, but passes on circa $30 of that GST collected to you as a non-GST registered owner. This is known as the “flat rate credit”. You can read more about the flat rate credit in Anthony Strevens’ blog here.
When the property is not being rented out, you and your family spend time there, as do your siblings and their families. In total there are 50 nights of private use over a 12-month period. Now we finally get to the trap.
The GST trap
Because the property is owned by a trust and because you and your siblings are associated to the trust, your private use of the property is a deemed supply at market value for GST purposes. This has two very significant consequences in the context of this example.
First, at the market value rate of $400 per night, a further 50 nights of occupancy means another $20,000 of turnover for GST purposes. Although this is “deemed” turnover, and not real income, it is included in assessing whether or not the $60,000 threshold is breached. The actual revenue of $45,000 from Airbnb, plus $20,000 of deemed revenue from the associated party private use, equals a total of $65,000. As the threshold is breached, the trust is now required to be registered for GST. This is bad news for you. It drags the property into the GST net leading to potential exposure to having to pay GST on sale. While you can get a GST claim for the cost of the property, this is anchored back to the original cost 30 years ago.
On top of that, the trust not only loses the $30 flat rate credit it was getting from Airbnb (Airbnb now send the full $50 of GST to the IRD as soon as the trust becomes registered for GST), but the trust has to pay GST on the deemed $20,000 of income from the private use. Put another way, each time you and your siblings use the property there is circa $50 of GST to pay.
Summary
In summary, the moral of the story is you have to be very careful if you are going to start to rent out a property on a short-term stay basis and continue to use it privately. While it is one thing to keep the actual income below $60,000, you need to be conscious of the fact that for GST purposes your own private use of the property can be counted as additional income and included in the calculation to determine if you exceed the $60,000 threshold.
Note that the trust does not pay income tax on this hypothetical income from the private use, but it does trigger GST to pay. Worst of all, it drags the property into the GST net which is the equivalent of a 13% proxy capital gains tax applying to the value of the property.
If you are concerned that you might be caught by this GST trap, make sure you contact your GRA Client Services Manager for advice as soon as possible, or if you are not already a client, request a meeting to see how we can help you.
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