Property problems: Industrial trust's sales tax on holiday home

Q. I am the trustee of a family trust. The trust has industrial property income and is registered for GST. Several years ago the trust built a house to be used as a holiday home for the beneficiaries. The house was only for private use and did not produce an income, and therefore a GST refund was not claimed on the construction or maintenance cost. The trust now wishes to rent the property for short-term stays to produce income on which GST will be added. The beneficiaries will not use the property in the future as the trust has acquired another property for their use. It is intended to incorporate the rental income and GST from the house with other income and deduct any GST paid for management, repairs, etc. In the future, if the house is sold for a much higher price than construction costs plus GST, how does the trust address the issue of GST, i.e. does the trust claim all GST refund now on the cost of construction or have the house valued now and only pay GST on the increase in value when the house is sold?

A. For GST purposes, renting the house for short-term stays will mean it is a "commercial dwelling" and therefore the trust is correct in recognising that General Sales Tax will need to be accounted for on the rent receipts.

When a person acquires goods and services (on which GST was charged) other than for the principal purpose of making taxable supplies, no GST input tax credit may be claimed.

However, to the extent that those same goods and services are later applied in the making of taxable supplies, a GST input tax credit can be claimed based on the lesser of the GST inclusive cost of those goods and services or their open market value.

Assuming the house owned by the trust has increased in value, the input tax credit would be based on cost.

Where goods and services are only partly applied for a taxable purpose, but continue to be principally used for non-taxable purposes, an input tax credit can be claimed to the extent of the taxable use either in each applicable taxable period or in each year.

However, if goods and services costing more than $18,000 will be wholly applied for a purpose of making taxable supplies, the Inland Revenue may allow a single adjustment to be made whereby all the GST charged is claimed back in one hit.

In deciding whether to allow a single deduction, section 21H of the GST Act requires Inland Revenue to take into account:

* Whether it is practical to require a deduction on a return by return period or annually (if the extent of business use fluctuates during a year, period-by-period or annual adjustments are considered by Inland Revenue to be more practical);

* Whether the person has previously made one-off input tax or output tax adjustments (here the Commissioner for Inland Revenue will check whether persons are obtaining a tax advantage by making output tax adjustments on a periodic basis yet claiming one-off output tax adjustments);

* The nature of the goods and services (the commissioner has indicated that a one-off adjustment should apply where real property is likely to be retained for a number of years, as few compliance cost saving benefits would arise where assets will be held only for a short time).

As the trust will now use the house entirely for taxable purposes, it should apply in writing to its closest Inland Revenue service centre for approval to make a one-off adjustment in respect of the GST component of the construction costs.

If approval is granted, the trust will be obliged to account for GST on the value of any subsequent non-taxable use of the house for the taxable period in which that occurs (eg. if the beneficiaries use it at any time free of charge).

If the house is sold in the future, the trust will need to account for GST on the entire sale price, not merely on any increase in the house's value from the time the trust begins using the house to make taxable supplies.

If the trust sells the house to an associated person for less than market value, it would have to account for GST on the open market value of the house unless the purchaser both acquires the house for the principal purpose of making taxable supplies and is, or would be, entitled to a GST input tax deduction for the tax fraction of any consideration paid.

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