Unfortunately, Covid-19 has closed the border and the subsequent quarantine/lockdown has restricted people to their own homes, which has brought the tourism industry to a dramatic halt. Because of this, property owners have had to reassess what do to with their short-term rental. Some properties remained vacant, while others have decided to rent their property on a long-term basis to tenants.
While these outcomes are often out of their control, property owners need to be aware that there could be some tax implications that arise as a result, particularly in relation to goods and services tax (GST), where the cash impact can be significant.
Providing short-term rental accommodation via a platform like Airbnb can result in a GST obligation because it is considered a taxable activity for GST purposes. Whether an owner is required to register for GST will depend on whether they have exceeded $60,000 in gross rental income in any 12-month period. This might seem unlikely, but in places like Queenstown Lakes, many have reached this threshold so will be subject to GST. Even if the gross rental is below this threshold, many others have elected to voluntarily register for GST.
Being GST registered is significant, because when short-term rental property is vacant, or the use has changed, it can result in a significant GST obligation.
For instance, a person can remain GST registered only if they are undertaking the taxable activity (in this case, short-term rental) on a ‘‘continuous and regular’’ basis. If a person is unable to rent their property for an extended period of time, there is potential for the IRD to argue that the short-term rental activity is no longer being undertaken with enough regularity to remain GST registered.
In this circumstance, they could deregister the person, requiring the taxpayer to account for GST on the ‘‘deemed sale’’ of the asset. For example, a person subject to GST de-registration with a property worth $1 million might need to return around $130,000 of GST to IRD.
A similar issue could arise for those who have switched from short-term rental to long-term residential rental.
If the switch is permanent, they could be deemed to have ceased their taxable activity and be required to deregister and account for GST as above. If the switch is temporary, it might be possible to remain GST registered, but some adjustments will be required to reflect that temporary change. Such cases will be treated on a case-by-case basis, and anyone affected should see a specialist adviser.
Another potential GST outcome in such times is the mixed-use asset (MUA) rules, which apply when a person uses their property both privately and as a rental.
These rules will apply to many owners of Airbnb rentals, as they are frequently used privately as a holiday home in addition to being rented out. A decrease in rental nights, due to vacancy during lockdown and lower tourism numbers, could increase a person’s private use percentage, requiring them to pay back some GST to IRD based on the cost of their property.
All these outcomes have the potential for some significant cash payments to the IRD. Therefore, it is important to seek specialist advice to ensure you put in place the best plan for you. We are hopeful the IRD will apply some latitude in such circumstances, given the external forces driving these outcomes.
In addition to the above, there are other key factors that owners need to keep in mind. Many might incur losses on their rental properties due to a lack of rental income. It is possible the newly introduced ring-fencing of rental losses might apply and prevent that tax loss from being offset against other income. This will apply to typical residential rentals and to some short-term rental properties.
Owners of Airbnbs and the like should also be aware of the bright-line rule, which could open them up to tax on sale of a residential property if it is sold within five years of purchase. This could be an issue if you are forced to sell your short-term rental due to vacancy and decreased rental income.
Given the consequences of these impacts on a taxpayer due to Covid-19 lockdown and an economic slowdown, owners need to be aware of both risks and obligations, to make informed decisions that could potentially save them much-needed cash during these difficult times.
- Scott Mason is a tax specialist and managing partner at Findex in Dunedin.
