Airbnb GST Traps
The IRD recently released a statement on tax issues for short term rentals - Matthew Gilligan explains these traps and how to avoid them.
1 March 2020
Prior to Christmas, the IRD issued a draft statement confirming some of the traps that exist when renting out property via platforms like Airbnb and Book a Bach. This month I thought I would set out examples that we have seen over the past few years as use of these peer-to-peer sites has exploded.
Trap One – Claiming Gst On Purchase
Ron and Leslie bought a coastal property as an investment. Upon discovering that renting it out short term to holidaymakers allowed them to register for GST, they decided it would be a good idea to do so. Because the vendor was not registered, they were able to claim GST on purchase. They also claimed GST back on the significant amount they spent renovating it, ready to be rented out. Unfortunately, their focus on the short-term cashflow benefits of GST registration proved to be detrimental long term. Firstly, they failed to appreciate their revenue is now subject to GST meaning that their projections of a healthy profit were significantly reduced. Secondly, and more concerning for them, was the news that they will eventually have to pay GST when they sell the property. They now face the prospect of 13% of the long-term capital gain being eaten up by GST.
As their rental turnover was not expected to exceed $60,000 per annum, they could have avoided all of this by voluntarily not registering for GST and sacrificing the benefit of the upfront claims.
Trap Two – Inadvertently Caught In The Gst Net
Tom and Ann were well aware of the downside of claiming GST, so when they bought a holiday home they thought they avoided that trap by not claiming GST. However, Tom and Ann had a wide variety of interests including a vineyard which they operated out of a trust.
They employed the same trust to buy the holiday home. While the turnover from the holiday home was well below $60,000, because it was owned by the same trust that was carrying on the wine-making business, the property was automatically dragged into the GST net. Because the trust was already registered for GST in relation to the vineyard, GST was automatically applicable to the short-term stay. The fact that they had not claimed GST did not make a difference because the shortterm stay revenue simply added to the vineyard revenue.
Trap Three – Sale Traps
Finally we get to Andy and April who spend six weeks each year travelling the country in their caravan. During this time, they rent their home to holidaymakers on a short-term basis. They decided to register for GST and made a proportionate GST claim in relation to the purchase price of the home (i.e. based on a ratio of 6/52). Having done this they understood that there would be consequences when they eventually sold the property, but thought that those consequences would see them paying GST on the same proportionate basis as they claimed it. Unfortunately, that is not the case. They were shocked to learn that GST was applicable to the entire sale price even though they had only claimed 6/52 of the purchase price originally. They were permitted to claim the remaining GST that they did not claim initially, but as the property had increased in value significantly, the amount that they had to pay on
the sale price far exceeded this additional claim.
You may wonder if any of the above clients could have avoided their predicaments by simply de-registering for GST prior to sale. Unfortunately, that does not work in most instances because de-registration is a deemed sale at market value triggering GST to pay and you don’t have the sale proceeds to help you.
In summary, while it might be a great idea to generate some extra cashflow, you need to be careful if you are going to rent out your home or holiday home to short-term occupants. The GST traps described above are just some of the issues that you need to be aware of. As always, seek expert advice. ■