One of the most common questions we receive as tax advisors is about the property tax implications of renting out a spare room, unit or additional building (such as a converted garage) on a personal property.
The best way to gain clarity on your personal circumstances is to work with a property tax expert, who can guide you through specific income tax and GST requirements and help you make informed decisions.
However, let’s dive into the details—when considering the property taxation of short-term rentals, both Income Tax and GST implications must be carefully evaluated to ensure compliance and optimise your tax position.
In New Zealand, rental income is typically subject to income tax. Even occasional or one-off rentals may be taxable, including renting a room to a flatmate. However, there are certain exceptions to ease the compliance burden on smaller-scale rentals.
For instance, a low turnover threshold may apply if the property falls under the mixed-use asset rules and the rental income is less than $4,000 per annum. There are also standard cost rules that apply to boarder income and low-volume short-term rentals (100 or less total room nights per year). The mixed-use asset rules are specific rules that apply when a rental has both a private and business use, but also more than 62 days of vacancy a year.
Under each of these rules, income doesn’t need to be returned if income is below the thresholds. This doesn’t make the income non-assessable, but rather the IRD has determined that returning that income wouldn’t be worthwhile based on the expected cost associated with the rental.
Outside of these narrow situations, the income must be returned and tax paid to the IRD.
When the income is taxable, it is possible to claim deductions against this income.
However, costs must be directly connected to generation the rental income or to the rental business itself. In this regard it is important to be able to identify how a certain cost (such as interest on a mortgage) is connected to the rental.
This isn’t clear in cases like renting a spare room, because costs will usually have both a connection to the rental, and private purposes. As a result, costs must be apportioned.
There are different methods for calculating apportionment based on the property and its use, including apportionment under the mixed-use asset rules.
In addition, it is possible for the ring-fencing rules to apply and there is still a need to consider interest deductibility for a period of time.
It is possible for rental of short-term accommodation to be subject to GST, albeit it will either require the owner to already be GST registered or for the gross sales to exceed $60,000 in any 12-month period.
In many cases, this doesn’t arise when a single spare room is rented out. However, in certain regions it is becoming increasingly common for units and other building conversions to get high returns and as a result exceed the GST registration threshold.
GST can be a significant issue in this regard because not only does it result in additional compliance (GST returns are a separate filing to income tax), but there can also be significant cash consequences.
For example, passing on the full 15% GST cost to guests may not always be feasible, which could reduce net rental income. Furthermore, assets used in the rental activity (e.g., the house) may become subject to GST upon sale. While a claim might be available on the property, this is limited to what it cost not its market value at the beginning of the activity. The payment of GST at the end will be at market value.
In a case where only part of a property is being rented short-term, there is a limited option to keep a property out of the GST net even if income is over the $60,000 threshold. This requires the property to not principally be acquired for making of taxable supplies and not used for making taxable supplies. It also requires that no GST claim is made for the property (the asset not the operational costs such as rates and insurance).
Even if not required to register for GST, almost all short-term rental property operators are subject to GST to a certain degree due to the recently introduced Marketplace Rules. Under these rules GST is withheld from all rental income regardless of whether or not a person is GST registered.
We have worked with many clients in this space to help them navigate how the GST rules apply.
As interest rates stabilise and the economy shifts with an increase in property sales on the horizon, it’s the perfect time to refresh your understanding of key property tax matters and get clarity on the latest updates.
Working with a tax advisor who specialises in property tax can be invaluable, ensuring you understand all relevant regulations and avoid costly mistakes. Good property tax advice will guide you through the complexities of income tax, GST, and compliance requirements specific to short-term rentals, helping you maximise deductions and maintain accurate records.
Join us at our upcoming Property Tax webinar, where we’ll address the most common questions and provide insights on managing property taxation effectively.
Date: Tuesday 12 November
Time: 12pm – 1pm
This document contains general information and does not constitute legal or taxation advice. If you need legal or taxation advice, we recommend you speak to a qualified adviser.
The views and opinions expressed in this article are those of the author/s and do not necessarily reflect the thought or position of Findex.
The title 'Partner' conveys that the person is a senior member within their respective division and is among the group of persons who hold an equity interest (shareholder) in its parent entity, Findex Group Limited. The only professional service offering which is conducted by a partnership is external audit, conducted via the Crowe Australasia external audit division and Unison SMSF Audit. All other professional services offered by Findex Group Limited are conducted by a privately-owned organisation and/or its subsidiaries
Nov 2024
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