Holiday Homes and GST Risk
6 February 2018
HOLIDAY HOMES AND GST RISK
From the 1/04/11 the definition of a dwelling changed for GST purposes. In the past a holiday home would be exempt for GST, but this change of definition most likely makes them liable for GST. If purchased before 1/4/11, there is an amendment that excludes holiday homes, but any holiday home purchased after 1/4/11 DOES NOT have the exemption!
So, in theory, you could claim GST on the purchase of a holiday home (as long as not purchased from a GST registered vendor as then zero rating, or purchased from an associated entity as a limitation can apply), and the portion used, for the rental business.
You would then need to pay GST on rent, but could claim GST on other expenses.
Issues with claiming GST
- Property goes up in value, so when you sell you have to pay a lot more GST than you claim.
- Watch out for any GST registered vendors when purchasing, as compulsory zero rating (get specific advice!)
- Often private component, which creates hassles and deemed supply rules.
So, often we recommend that a holiday home is kept out of the GST net and NO GST is claimed.
1) Over GST threshold of $60,000
For example, an investor buys a multi-million dollar holiday home on Waiheke Island and it is rented for more than $60,000 for the year. Non GST registered entity:
- Have to GST register as over threshold, so pay GST on income.
- Deemed supply (see point 7 below).
2) GST register entity later
For example, an investor has a holiday home in a Trust and it is rented out, but for under the $60,000 threshhold. The Trust buys a commercial property, so GST registers. The Trust will now have to pay GST on the holiday home rent and be liable for GST on the eventual sale.
3) A Trust is GST registered with commercial property and holiday home
- If holiday home is not rented and just used privately, then no issue.
- But if there is a change of circumstances and the holiday home is rented, then falls into GST net. So might just rent for 2 weeks over Xmas to get the high rent!
General rule is not to put holiday homes in a GST registered entity.
4) Leftfield result
Entity owns a commercial property, is GST registered and also owns long term residential rental properties. In theory, there should be no issues as the residential rental properties are exempt for GST. But:
- rental property at Papamoa, was long term residential rental, but becomes vacant , so is rented out as a holiday home over summer. Now falls into GST net.
- rental property in Christchurch is rented out as long term residential rental property. But tenant is using it as an office, so no longer fits dwelling definition, so would fall into GST net.
5) Farms - Watch what the dwellings are used for.
- used as family home, will be exempt.
- rented as long term home to farm worker, will be exempt.
- used as short term accommodation and rented to shearers, then not exempt.
6) Commercial and Residential
- If buying from a developer, then not used as dwelling, so whole land and building is zero rated.
- Bad from purchaser's perspective as effectively paying more!
7) Deemed supply
- Have to pay GST on deemed value of private use and could push you over $60,000 threshold. For example, have a holiday home and received $30,000 of rent. Holiday Home is also used for private use, and market value would be $40,000. The rent combined with the private use market value is over $60,000, so have to GST register and fall into GST net.
- Have to pay GST on rent and on deemed private use.
- Would also have to pay GST on sale!
"The vendor warrants that any dwelling and curtilage or part thereof supplied on sale of the property are not a supply to which 5(16) of the GST Act applies".
If you are GST registered, be careful if this clause is changed, as it probably means the dwelling is either not a dwelling for GST purposes, or that GST has been claimed on this by the vendor, so would be zero rated. Overall result if you're not careful is that the purchaser can pay too much.
Often it pays to check what the dwellings are used for to make sure they are exempt for GST when purchased . This especially applies to farms as per point 5 above.