12 May 2020
On the back of a booming tourism industry, the expansion of Airbnb throughout New Zealand in recent years has been prolific. The combination of being able to derive great returns while maintaining control and flexibility of your property has seen a boom of properties listed on Airbnb and similar such platforms, often to the detriment of the more typical residential rental stock.
However, this dream run ended abruptly with the most unwanted of arrivals, COVID-19. Because of closed borders and widespread lockdowns, people have been unable to travel as they normally would. Suddenly the demand for the Airbnb market is largely non-existent and is expected to be soft for many months to come.
In places like Queenstown, the impact has been significant due to the high number of properties available for short term rental. Many of these are now either vacant, housing those in quarantine/lockdown, or being offered to the residential rental market.
For many, the last option of making a property available as a residential rental is essential, as usually funds have been borrowed to buy or build an Airbnb and income is needed to service debt and meet costs. Owners simply can’t wait until tourists return.
So how does this decrease in tourist numbers and associated change of use, impact the tax position of affected Airbnb owners?
In many cases the biggest cash impact will be in relation to Goods and Services Tax (GST). This is because providing short-term rental accommodation is usually a taxable activity for GST purposes. Therefore, if an owner exceeds $60,000 in gross rental income in any 12-month period, they are required to be registered for GST in relation to their Airbnb rental. Many have exceeded this threshold and have registered for GST (or should have), while many others have registered for GST voluntarily.
The impact of GST registration is a significant cashflow consideration because it means a property used in that activity will either be subject to GST on sale or subject to significant capital adjustments on a change in use.
So how does an above change in use of a short-term rental property impact you?
Many properties are currently not being used due to COVID-19. If this continues, there are two main impacts for those who are GST registered.
The first is that some owners may need to make GST adjustments in the coming year under the Mixed-Use Asset (“MUA”) rules. The MUA rules apply when a person uses a property both privately and for deriving income. This will impact many, as properties used for Airbnb are often used privately as a holiday home in addition to be being rented.
A significant adjustment could be required because under the MUA calculation, a reduction in rental nights could increase a person’s overall private use percentage. This could require them to pay back some GST to the IRD based on the cost of their property.
For any affected taxpayers we recommend you get in touch with your advisor to ensure you understand how this might impact you and what options you have.
Perhaps the more significant issue with a vacant property is if the period of vacancy continues. A person can only remain GST registered if they are undertaking their taxable activity on a “continuous and regular” basis. If a person cannot rent out the property, then there is an argument that the short-term rental activity is no longer being undertaken with enough regularity or continuity to remain GST registered.
If this was to be enforced by the IRD, the impact could be severe. This is because if a person no longer undertakes a taxable activity they are required to de-register from GST. A de-registration requires the person to account for GST on a deemed sale of their asset at its market value. For instance, if a person was subject to a de-registration and their property was worth $1m, they would need to return GST of around $130,000 to the IRD.
The above analysis is very simplistic and there are grounds for arguing that the activity does in fact continue during this time. However, it is important to talk to a tax expert to ensure you have what you need in place to support any such view. We have also raised this issue with the IRD to encourage reasonableness for those affected.
Permanent Change in Use to Residential Rental
For those who have made the switch from a short-term accommodation to a long-term residential rental, the position is clearer.
A long-term residential rental is considered exempt from GST and therefore, if a person was to move from short-term to long term residential rental they will need to account for GST on that change in use. This will either be by way of de-registration event as noted above, or a change in use (if they still undertake another taxable activity).
There might be some adjustments or additional claims that could be available in such a case to help offset the likely cash cost of this transition, so it is important that you talk to your advisor to manage this process.
Temporary change to Residential Rental
There will also be many who are still planning to continue their short-term rental activity, but in the interim are renting their property as a residential rental to meet costs. In such cases, the position is much less certain.
There is a risk that such a change could result in the IRD arguing that a taxable activity has ceased and therefore would require the de-registration outcome as noted above. However, there are arguments that the activity is continuing, with any residential rental only being temporary and does not amount to a 100% change in use or cessation of the taxable activity. Instead, a person in such a case should be entitled to remain GST registered, but should adjust for any exempt or non-taxable use.
This position will be fact specific and an owner will need to demonstrate that their activity is continuing. There are several measures that will need to be in place to support this position. If you are in this position it is imperative that you contact one of our tax specialists to assist you with your situation and what you need to do.
We have also raised this issue with the IRD to determine whether they will provide some guidance for those affected.
Claiming GST on Property Purchases
One additional issue that has arisen is for those who are completing property transactions during this time and claiming GST on the basis that they are going to undertake a short-term rental activity.
The IRD reviews GST claims of a certain size, which would almost always include a claim for GST on the purchase of a property.
In the current COVID-19 climate IRD has started to push back on GST claims for short-term rentals on the basis that there is likely to be an absence of tourists for a number of months. As such it would be impossible for a person to rent a property and therefore carry on a taxable activity of short-term rental.
We note that this position is a very broad-based position and is does not necessarily mean that a taxable activity is not being undertaken. Again, this will need to be considered on a case by case basis. Therefore, if you are claiming GST on property during this time it is important that you consult a tax expert to ensure you have a strong position.
We note the above items only cover GST, which is a significant, but is not the only consideration. For instance, many Airbnb style properties will be subject to other rules /considerations such as:
- Bright-line Rule – can tax the sale of residential property if sold within five years of purchase, which could be an issue if a person is forced to sell their short-term rental.
- Ring fencing of rental losses – these rules restrict a person’s ability to offset a loss from a rental property against other income, which could be applicable in the current environment and may apply to some Airbnb rentals.
- Regulatory impacts – there are requirements on landlords that could impact on a landlord’s ability to remove a tenant to convert back to a short-term rental.
- Council rating – if you are currently rated to provide visitor accommodation, you may want to think about your rating if you move to residential rental and any limitation to revert.
- Lending – there could be impacts on your borrowing conditions if you change use.
As we continue to traverse the COVID-19 landscape, there are industries across the globe that will continue to be impacted. In the case of those in short-term rentals, the drop-in revenue has been swift and significant, causing a change in how a property has been used. The impact of any such change can have significant flow on effects, such as GST.
To help you work out the best overall approach that suits you and your needs, please reach out to one of our taxation specialists.
Findex NZ Limited, trading as Findex
While all reasonable care is taken in the preparation of the material in this communication, to the extent allowed by legislation Findex accept no liability whatsoever for reliance on it. All opinions, conclusions, forecasts or recommendations are reasonably held at the time of compilation but are subject to change without notice. Findex assumes no obligation to update this material after it has been issued. You should seek professional advice before acting on any material.
The information contained is of a general nature only and does not take into account your objectives, financial situation or needs. You should consider whether the information is suitable for you and your personal circumstances. You should seek personal financial advice before acting on any material.
This document is also not intended to constitute legal or taxation advice. If you need legal or taxation advice, we recommend you speak to a qualified adviser.
© Findex Group Limited 2020. All rights reserved