Rent And GST
The GST impacts of switching a rental property from short-term to long-term.
1 September 2021
Q
A
You cannot elect to pay GST on residential rent. The provision of residential accommodation is an exempt supply from a GST standpoint. This means if you own property that is rented out on a residential basis, then you are not conducting a “taxable activity” for GST purposes. As part of a series of concessionary rules brought in when Covid hit, the IRD said that it would allow people in your situation (ie who owned property that was previously rented out on a short-term stay basis) an 18 month period where they can “pause” their taxable activity without having to deregister for GST. It sounds like the IRD is signalling to you that the 18 month period is about to expire. This means if you are to continue to rent these properties residentially then you will be required to deregister for GST and pay GST on market value. If you cease the residential rental activity and revert to renting the properties on a short-term stay basis, or if it is possible to rent them to a commercial tenant, then you will be reverting back to conducting a taxable activity. In these circumstances you can continue to be registered for GST. Unfortunately it is not as simple as renting the property to a GST registered self-employed person who occupies it as their primary residence. While they will be GST registered, the provision of accommodation to them is not a taxable activity for GST purposes. - Matthew Gilligan.Q
I am planning to buy a property with my parents as joint ownership to leverage my parents’ income to take out a bigger loan. My parents already live in a house so the new property will only be occupied by me and my wife. Will this property be considered the “main home” exemption in the case that we dispose of it within 10 years (bright-line period), given that only one of the three owners occupies it?
A
Yes, this property can be considered to be your main home where there is joint ownership with your parents, but the main home exemption will only extend as far as your share of any gain realised. This means if the property is sold within the 10-year bright-line period, and you have occupied the property as your home at all times during the period of ownership, you will not have any tax to pay on your share of the gain. On the other hand, your parents will have tax to pay on their share of the gain on the basis that the property has not been occupied by them as their main home. - Matthew Gilligan
Q
Hi I live in Australia and have a property in Auckland. I want to use the equity in it to buy another property. The property has a mortgage of $369,000 and a current RV of $1.5 million. The mortgage comes off fixed interest in October and I want to access the equity to buy another property. We have $120,000 combined income and want to access $30,000 to do up an existing rental property and keep it and either build or buy in Taupō. Is this doable? We are looking at $1-1.6 million valuation.
A
Based on your equity, you are in a strong position and should have options. The income side is where we would need to look at things more closely. You have stated an intention to move back to New Zealand and I presume your income is Australiabased. If you are moving back in the short term then New Zealand lenders will want to know what your New Zealandbased income will look like, which will mean waiting until you have income sources locked down. If the move back here is further into the future, we would need to know more about your Australian circumstances, such as what rent are you paying, or if you have a mortgage what is the situation with this. We would also need an indication of what rental you believe you could achieve for the existing property. If you have adequate equity and minimal debt my assumption is you should be able to do something, but we would need to dig into the numbers to be able to give more of an idea as to what level this would be. - Kris Pedersen
Q
What are the duties and responsibilities of residential property managers towards managing landlords’ properties? Is there a clause in the Residential Tenancies Act stating the landlord is responsible to pay for damages caused by the tenant? Under what circumstances can a landlord hold the property management company accountable for property damages as a consequence of putting in the wrong tenant? How do you claim compensation from the property management company?
A
The relationship between a property owner (landlord) and a property manager is not covered by the Residential Tenancies Act. Professional property managers should have a comprehensive agreement outlining the services they will undertake on behalf of the property owner. It should be clear to the property owner exactly what the property manager will and will not do on their behalf.
Their duties will more than likely include showing and interviewing prospective tenants for the property. Carrying out good due diligence on prospective tenants is very important. Most property managers, who have been in the business for a while, will have a sad tale of woe regarding making the wrong decision on selecting tenants for a property. Some property owners are happy to let the property manager manage all aspects of the property – including choosing tenants – while other owners often want to remain involved in decisions about their properties which includes the final say on offering a tenancy to new tenants. Generally, it’s the responsibility of the property manager to take action against tenants who cause damage to a property during the tenancy. The type of action taken will depend on whether or not the damage is intentional and whether the tenants accept responsibility. If you feel the property manager hasn’t taken the appropriate action regarding damage, then in the first instance you should discuss with the property manager what action they took and why. - Ryan Weir
Q
Is there a capital gains tax when you sell a New Zealand rental property that has been in a limited company for 20 years?
A
No, New Zealand has no capital gains tax. It does though have a raft of legislation that can impose tax on gains on property sales, particularly if the properties were acquired whilst in the business of developing, trading or building. These taxing provisions, though, normally only apply if the property was not held for 10 years. Note also that when a company distributes a dividend from a capital gain this is still taxable to the shareholder unless it is done when the company is in liquidation. - Mark Withers
