Many Airbnb owners have had no choice but to change the use of their properties from short term accommodation to long term residential rental, as the short-term visitor and tourism bookings dried up overnight. This situation is unlikely to ease while travel restrictions are in place and our border remains shut.
This can create a big headache for those Airbnb owners that are GST registered in respect of their short-term accommodation activity, particularly if that is the only activity they have. This is because providing short term accommodation via the likes of Airbnb is a GST taxable activity, whereas providing long term residential accommodation is not - its GST exempt. You may be thinking, surely that is a good thing, as Airbnb owners won’t need to account for GST on the rental income received?
While it is true that no GST needs to be accounted for on the residential rental income received, there is a larger concern, being the deemed cessation of the person’s GST taxable activity. Where a person ceases their GST activity (that is, they won’t be making any GST taxable sales or supplies for the foreseeable future) there is a deemed disposal at market value of all the assets used in the taxable activity.
In other words, if your GST activity has ceased because your Airbnb is now used for residential accommodation instead of short-term bookings, the GST rules treat you as having sold your Airbnb property for its market value. You will then be liable to pay the GST fraction of the deemed sale price to the IRD in your final GST return.
So if you have a holiday home used for Airbnb bookings valued at $600,000 and you are forced to use it for long term residential rental to offset costs, you may potentially be looking at a GST liability of around $78k. Not only is your income down, but you now have a hefty GST bill.
The good news is that IRD yesterday issued a COVID-19 variation determination which will help Airbnb and other short-term accommodation owners avoid this outcome, where the situation has arisen because of COVID-19.
The IRD have stated that a person’s GST registration will not be cancelled where there are reasonable grounds for believing that the person will carry on their GST activity (i.e. resume their short term accommodation activity) at any time within 18 months from the date their taxable activity ceased.
So, in effect, you can avoid the hypothetical $78k GST bill providing your short-term accommodation activity resumes within 18 months of changing the use of the property to long-term accommodation. There are a couple of requirements to be eligible for this relief; firstly, you must have ceased your short-term accommodation activity because of the effects of COVID-19 and secondly, you must notify the IRD. The relief only applies between 17 March 2020 and 31 October 2020.
This is a welcome move by the IRD, it is good to see they are responding quickly to the practical effects of COVID-19. What remains to be seen is how they will interpret a person’s intention to resume their activity vs. reality, particularly if the effects of COVID-19 extend longer than we anticipate.
Maggie is the Tax Director at Nexia Christchurch, and has more than 17 years of experience in providing tax advisory services.
Maggie has dealt with a wide range of entities from large corporates, through to SME's, trusts, ex-pats and high wealth individuals. She is well placed to advise and provide practical and pragmatic solutions on any tax or GST issues you may be grappling with.
p 03 379 0829
August 19, 2020