GST impacts from changes in use of short-term holiday accommodation (Airbnb)

11 September 2020

Due to the impacts of COVID-19, including border closures and widespread lockdowns, many people have been unable to travel as they usually would. As a result, the demand for the Airbnb market is largely non-existent and is expected to remain that way for now. Multiple properties are either vacant, housing those in quarantine or lockdown, or on offer to the long term residential rental market.

For many owners, putting their rental property on the long term residential rental market is essential, as typically funds have been borrowed to buy or build an Airbnb property and income is needed to service debt and meet costs. Owners simply can’t wait until tourists return.

So how does this decrease in demand 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), which the owner should have registered for. There are three ways in which a change in use of a short-term rental property could affect owners.

1. Vacant Property

If properties continue to remain vacant, there are two main impacts for those who are GST registered.

Firstly, some owners may need to make GST adjustments in the coming year under the Mixed-Use Asset (MUA) rules as properties used for Airbnb are often also used privately as a holiday home.

A reduction in rental nights could increase a person’s overall private use percentage, which could require them to pay back a significant amount of GST to the IRD based on the cost of their property.

Secondly and perhaps more significantly, is whether the person can remain GST registered if the period of vacancy continues. To be GST registered, the taxable activity (short-term rental) must be “continuous and regular”. If a person cannot rent out the property, then there is an argument that this requirement may not be satisfied.

If this was to be enforced by the IRD on the basis that 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.

2. Permanent Change in Use to Residential Rental

For those who have made the switch from a short-term rental 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.

3. Temporary change to residential rental

There will also be many owners who still plan to continue their short-term rental activity, but in the interim are renting their property as a residential rental to meet costs. This 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. This position will be fact specific and an owner will need to demonstrate that their activity is continuing.

Other impacts

GST is not the only consideration. Many Airbnb style properties could be subject to other rules and or considerations such as the bright-line rule, ring fencing of rental losses, regulatory impacts, council ratings and lending.

If you would like advice on GST and short term rentals, please contact the Findex Business Advisory team.

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