Section2 Investor series #3
In October 2021, Labour limited the ability for investors to claim interest as a deduction for existing residential properties. However newbuild and developments were exempt from this limitation. The outcome of this change is that investors were paying tax on income that they didn’t receive. This compelled investors to look for other ways to make property investment stack up.
However some of these options have cost impacts that you might not have anticipated, one of these being exposure to taxation implications, specifically GST.
- Airbnb
If you rent out your property or part of your property as short stay accommodation, does your gross income equal or exceed $60,000 per year? Short stay accommodation is defined as up to 4 consecutive weeks at a time and is a taxable activity in New Zealand.
From the 1 April 2024, online organisations like Airbnb were mandated to collect GST on your behalf, whether or not you are GST registered. They are responsible for collecting GST and paying it to the IRD.
- Subdividing
Whether a subdivision is a taxable activity is decided on a case by case basis. The IRD will ask questions on:
- Has a subdivision project carried on continuously or regularly?
- Does it involve the making of supplies (goods and services) to another person
- How many lots are created and sold
- The level of activity involved in the project
- Build to sell as a business (flipping)
If you intend to build to sell, you will automatically have a tax exposure. This is called the intention rule.
On the sale of the property you will automatically be pushed through the $60,000 GST limit and therefore liable for GST.
One detail I’d like to draw your attention to is, if like a lot of developers, you end up in a situation where your property doesn’t sell, you hold it and rent it out. What is your tax exposure? There are 2 issues:
GST on rent
If you’re renting the property out long term, the rental income is exempt from GST. However if you’re renting it as short stay accommodation, if the income generated is above $60,000 gross in a 12 month period, you will need to register for GST.
GST on the change in use
If you change the use of the property from selling to holding you are moving from a 100% taxable to a 100% non taxable use. Because of this you will need to make a GST change-in-use adjustment. Please seek advice.
In all cases, the easiest way to circumvent any tax surprises is to take advice from a chartered accountant who specialises in property before you put your plans into motion.
Top tips
- Find a chartered accountant that specialises in property.
- Understand your exposure before you start your project
- If the intention of the project changes, seek advice on the ramifications before you take any action.
- Purchase in the right ownership structure. If you’re in a hurry to get that sale and purchase agreement signed, don’t forget to circle the ‘and or nominee’ option, giving you the ability to change the purchasing entity should you need to.
Disclaimer – We are not qualified tax specialist. Please take advice on your unique situation with the right expert.
