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Tax Implications Of Flatmates And Boarders

It pays to be aware of tax obligations around both sets of stayers.

By: Sally Lindsay

24 October 2023

Q. Due to a relationship separation, I am looking at bringing a flatmate/boarder into my owner-occupied property. Are there any tax implications if I have either a flatmate or a boarder?

A. Firstly, there is a difference between a flatmate and a boarder or homestay student. A flatmate is someone who literally just rents a room from you, but a boarding arrangement goes further than that and generally includes a level of service like providing food, meals and even transport.

If it’s a flatmate arrangement, the rental income is taxable, and you must use the actual cost method to calculate deductions. They must then be apportioned between the income earning and the private use of the dwelling. If your expenses exceed rental income the excess loss is ring-fenced.

If it’s a boarding arrangement, you can use the standard cost method to calculate deductions if you have up to four boarders. If you have four or more boarders you must use the actual cost method. There are three components to the standard cost method: weekly standard cost; annual housing standard cost; and, if you are using a vehicle to transport boarders, the annual transport standard cost.

Tax is only payable if the rental income you generate exceeds the standard costs allowed for each boarder. The weekly standard cost covers things like food and utilities and is $222 per boarder for the 2023 year. The annual housing standard cost covers property costs like mortgage and rates and is calculated using a formula based on the cost of the house and whether it is owned or rented. You can use the IR 1255 worksheet to calculate the cost allowances for each boarder. There is no deduction for losses if the cost allowances exceed the income.

- Mark Withers

Q. How is a cash-back contribution from a bank treated for tax purposes; is it like an interest credit or a gift?

A. I am going to cut to the chase here. Assuming we are talking about borrowing in relation to a rental property, then the cash-back you receive is taxable income.

- Matthew Gilligan

Q. I am seeking guidance on who is responsible to repair or replace damage at a tenanted residential property. I engage a professional property manager because I am not local to my investment. However, irrespective of the damage I feel like the cost to repair anything and everything is put on me. I have looked at government websites but wonder if there is a difference in the real world eg, even if a tenant is responsible to fix something, is it more common for owners to do it to keep the peace?

In the past month the following has occurred: damaged or broken window blind (only 18 months old); windowpane that supposedly blew in during a storm (not the same window); blocked shower drain; blocked toilet. There also appears to be more beds in the house than necessary for the number of people understood to be living there; potentially seven, up from three. While I’m not opposed to more people in the property (within reason) this surely increases the wear and tear which should be reflected in increased rent. My property is negatively geared (though would be back in the black if it weren’t for the current state of interest deductibility) so regular repair costs are an unwelcome burden.

A. Holding tenants accountable for damage can be complex as it often involves the need to establish how the damage occurred, a task that can be difficult. It’s important to remember that the burden of proof lies initially with the landlord to prove the damage was not fair wear and tear. Following this, the tenant must prove the damage was either careless (and not intentional) or neither careless nor intentional. If the damage is neither careless nor intentional, the tenant is not liable. In each scenario you mentioned, for your tenant to be held fully liable your property manager would need to prove intentional damage.

An example would be an object deliberately placed down the drain which caused it to block. Re more occupants, under the Residential Tenancies Act 1986 tenants must not exceed the maximum number specified in the tenancy agreement. It’s crucial to discuss this concern with your property manager and ensure lease terms are adhered to. They can issue the tenant with a 14-day notice to remedy the breach. If the breach is not remedied, they can start Tenancy Tribunal proceedings. To ensure a productive partnership with your property manager it’s essential to maintain open and clear communication, regularly sharing information, concerns, and expectations.

- Ryan Weir

Q. How do banks look at borrowing when you go into a joint venture for property investment? Do they look at it as though I am borrowing the full amount or half?

A. With joint ventures they will look at it as if you are borrowing the full funds in most circumstances. In most cases this falls under “joint and several liability” which is where responsibility is shared by two or more parties and the lender can effectively pursue any or all of the parties.

This is because the lender can’t sell half the property if something goes wrong. There are situations where the individual guarantees can be limited, so you may wish to discuss this with your solicitor. Note that often, as full debt will be assessed on each joint venture party when assessing loan affordability, it may not make sense to always put all parties on the loan. I generally recommend starting by having all parties talk to a mortgage adviser to understand what lending hurdles there may be and then each party needs to get individual legal advice before moving forward.

- Kris Pedersen

Q. I’m interested in joining the Auckland short-term property market, but I’m new to the industry and its rental model. I know a factor for short-stay properties is the ability to optimise daily rates throughout the year, as opposed to the fixed pricing model of long-term renting. What’s the best time of the year to join the market, and do short-stays in greater Auckland work just as well as the CBD?

A. Now is the perfect time to enter the short-term rental market for several reasons, but peak season, with summer fast approaching, is a key consideration. Auckland experiences a large volume of domestic and international visitors when the warmer weather arrives. With an influx of booking demand, average daily rates (ADRs) can be raised exponentially. November right through to February is generally when an owner can earn the most.

Although Auckland’s CBD and city fringe suburbs achieve consistently high results, Auckland is known for so much more than its city centre attractions. Short-term rentals outside the CBD can perform just as well year-round, and in some periods, even better. Out west, the region is enveloped by the Waitakere Ranges’ native rainforest, featuring waterfalls, scenic hikes, and a world-renowned surfing hotspot.

Auckland’s northern and eastern coast is dotted with popular beaches and plenty of opportunities. Motorways and public transport services also provide visitors with easy access to the CBD. A bounty of nature-based activities draws in many and generates an increase in short-term rental demand outside the CBD. Takapuna and Devonport do exceptionally well, along with St Heliers, Orakei, Half Moon Bay, and areas in and around Auckland’s eastern coast. If you’re unsure about your property’s location, don’t rule out its suitability without talking to professionals. The Stay Hub’s free appraisals will give you an idea of what you can expect to earn in the market over the next 12 months. Pricing optimisation is key to incremental financial gains in the short-term market.

- Eric Hammond

Q. I put an Auckland flood insurance claim in for $156,000 and finally got the insurer’s outsourced reply. My 120m2 house was flooded with the bottom ripped out, including the bathroom and kitchen. I provided a remediation quote for $156,000. The insurer has determined that it will cost $110,000. They refuse to break down the figure further. How should I proceed to ensure I am getting a fair settlement?

A. You could refine your request to avoid asking for commercially sensitive matters or agree to conditions being imposed on your use of the information. Don’t ask to see just the scope of works and agree to redact information about rates. If this does not work, follow the insurers’ internal complaints procedure.

If you are not happy with the outcome, it’s likely your insurer is a member of a scheme such as the Insurance and Financial Services Ombudsmen Scheme (IFSO). Such schemes offer free, quick and user-friendly means to resolve disputes between clients and insurers and can make binding determinations.

You can request personal information under the Privacy Act 2020, but your insurer does not have to provide information which prejudices its commercial position or is legally privileged. Requests must be responded to within 20 working days. Insurers have been ordered to disclose documents like engineering reports where they contain personal information. If this does not work, you could bring a claim in the Disputes Tribunal.

– Shane Campbell & Brent McDonald

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