GST Changes to short stay accommodation properties
01 May 2023
The taxation rules that apply to short stay accommodation have been nothing short of complicated for some time, which have been exaggerated with the expansion of short stay rentals thanks to booming tourism and booking platforms like Airbnb. So, it was welcome news that the government was looking at simplifying some of these rules in their recent Tax Bill. However, while the changes do provide a level of simplification, many of the complexity in the current framework as we have previously outlined remain in play.
The simplification changes are focussed on how the GST rules apply to such properties. GST is a consumption tax which was introduced almost overnight back in 1986. As time has passed, ad hoc changes have meant a huge GST cost for many, particularly on things like land sales in cases where land was inadvertently caught in the GST net. Not to mention how business is conducted today (such as via Airbnb like platforms) doesn’t always fit well within the GST framework designed in 1986.
One of the biggest issues we deal with is people becoming inadvertently caught in the GST rules. One example of this was highlighted by the Inland Revenue Department (IRD) a couple of years ago, where they suggested that claiming a home office expense for income tax purposes could bring the whole dwelling or building into the GST net if you were GST registered. Another example is farm dwellings being dragged into the GST net if you sold them.
One change has helped remedy that situation, albeit with some limitations. The change would allow an eligible taxpayer to elect to treat predominantly private/exempt assets as being fully private/exempt even if there is some non-predominate taxable use. This can be an option even for existing property where GST has been claimed, if attended to by 31 March 2025. We suggest that if you are wanting to look at the possibility of selling something you consider to be outside the GST net that you should speak to your advisor soon, given the changes have now been enacted.
The other main area of focus has been on simplifying the adjustment rules that often apply to short stay accommodation. These include:
Introducing a principal purpose test for assets costing $10,000 or less rather than requiring annual adjustments for actual use
Reducing the number of adjustment periods required for monitoring private use for certain assets
Reducing the annual adjustments periods for land down to only 10 years (currently unlimited)
Removing the mixed-use asset rules from 1 April 2024
Allowing for a wider range of apportionment methods
These changes will certainly reduce the level of compliance and complexity that is required in certain situations. However, this is not a complete removal of having to do apportionment calculations. Further, just because the mixed-use asset rules are being removed from 1 April 2024, there will still be a requirement to account for private use for GST and the mixed-use asset rules for income tax are still in force.
Therefore, a person with a short stay property could end up having to do two different apportionment calculations rather than having to do one as they do right now.
The IRD will also be able to request greater information at the time of registration or claiming GST, which could increase compliance. Further, there are new anti-avoidance change in use rules that may impose a greater cost on taxpayers.
There will also soon be an additional cost for non-GST registered short stay property owners with the introduction of the Platform Economy rules. This will essentially impose GST on rental income for those who are not GST registered. This will be administered at the platform level (i.e. Airbnb) but will be a cost that should be considered in advance of these rules coming in on 1 January 2024.
Therefore, while the changes are welcomed, complexity still remains. The key is determining what the changes mean for you and adapting to the new requirements. Those who own an asset which doesn’t have a predominate taxable use or if you need to make a change of use adjustment, you should seek advice as there some decisions that should be made sooner rather than later that could have a material cash impact.
Watch our webinar here to understand how these rules apply and can impact your short-term rentals and trusts. We cover these changes, plus rollover relief, Brightline rule changes, and subdivision of land.
Or, contact the Findex Tax Advisory team to talk with an expert on your specific tax needs.