Tax warning for holiday rentals

Short-term rental accommodation providers in wealthy areas such as Queenstown should do their homework, says Deloitte tax partner Phil Stevenson. Photo/supplied

New Zealand's tourism boom means it can be lucrative to rent out property but owners need to do their homework or could get stung.

A lot of apartments and houses in areas such as Queenstown, for example, could easily be rented out on a short-term basis in excess of $1000 a night, Deloitte tax partner Phil Stevenson said.

"At this rate, it only takes 60 nights of occupancy to exceed the GST registration threshold, requiring the property owner to register for GST."

There were several implications from being GST-registered, Stevenson said.

The biggest and most obvious was GST often needed to be returned on the sale price of the property.

For residential property, that meant the vendor was likely to bear the GST cost because the property would most likely be sold on a GST-inclusive basis.

While it was possible to get a credit on the original purchase of the property, becoming GST-registered essentially gifted 15 per cent of any capital gain to Inland Revenue.

If a person decided to go back to using the property for private purposes and deregister for GST, they were deemed to have sold the property at market value and they would need to fund a GST cost without realising any cash from the sale of the property, he said.

In recent years, Inland Revenue had been focusing on taxing New Zealand's black economy which was made up in part by taxpayers providing short-term accommodation.

However, unlike a plumber's cash job or handshake agreements between friends, using an online platform to arrange short-term accommodation generated readily accessible electronic records.

"Warning: Inland Revenue and local government bodies are paying attention."

Inland Revenue had wide information gathering powers and the ability to request information from online platforms.

Inland Revenue could use the information to quickly identify who was providing short-term accommodation and request evidence income had been declared in a tax return and taxes paid, Stevenson said.

Similarly, with the recent requirement for IRD numbers to be associated with property transactions, it was now much easier for Inland Revenue to identify when GST should be paid on the sale of a property.

Local governments were also focused on short-term accommodation being provided.

Under local council regulations, a property used for short-term accommodation was generally considered to be a commercial property which might affect rates charges and result in other administrative requirements such as consents to operate, he said.

Taxpayers should also consider other contracts held if they were providing short-term accommodation to ensure items such as insurance over the property remained valid.

Staying just one night privately in a property being used for short-term accommodation could have a significant impact on the expenditure that could be claimed as a tax deduction because deductions for expenditure on days the property was empty could be disallowed, Stevenson said.

For debt-funded investment properties, that could have a significant impact on an after-tax return.

"Some of our clients get quite surprised when we tell them they might be better off staying in a hotel or renting the apartment next to theirs rather than staying in their own vacant property."

Stevenson also got puzzled looks when he tried to explain to property owners who had used a trust or a company ownership structures to protect their investment, if they became GST registered they would need to pay GST to Inland Revenue for the privilege of staying in their own holiday home.

The message for anyone wanting to rent their property on a short-term basis was to do their homework and make sure they did so with their eyes wide open.

"If you are crunching the numbers on a property investment, crossing the $60,000 GST turnover threshold and private use of the property may have a large impact on your bottom line."