As we head into summer, it is timely to consider issues around holiday homes and their potential GST implications.
While recognising that tax is the last thing on people's mind as we approach the festive season, some words of caution need to be exercised in light of recent amendments to the GST Act definition of "dwelling", "commercial dwelling", and also changes to the GST apportionment rules.
The definition of dwelling has been narrowed to include only those dwellings used as a "principal place of residence".
The definition also makes reference to section 38 of the Residential Tenancies Act 1986 to include a dwelling to which a person also has "quiet enjoyment". In essence, the new definition restricts the definition of dwelling to a private residence or long-term tenancy arrangements. Most notable for this article is that both holiday homes used periodically by a family (i.e. not as a principal place of residence) and "commercial dwellings" are effectively excluded from the definition of a dwelling.
The definition of "commercial dwelling" has been expanded to include home stays, farm stays, and bed and breakfasts activities. Although the definition does not specifically include holiday homes, given the short-term nature of many holiday home rentals, and that such holidays homes are not generally used as a principal place of residence, it is arguable holiday homes which are regularly rented out are now included within the expanded definition of commercial dwellings.
These changes mean that supplies previously regarded as GST exempt (as residential dwellings/rental) are now potentially within the GST net. This is not likely to be a big deal for most holiday home owners as the income they derive from such is unlikely to breach the GST registration threshold of $60,000. However, if they are already GST registered for other purposes, or their total supplies are close to the GST threshold, then care may need to be taken.
The immediate implication could be that an input claim is now available where, previously, it was not. Although an attractive sounding prospect, when one considers the long-term implications, it could be a short-term win at best.
Our concern focuses on situations where a person that is GST registered (e.g. as a plumber), also owns the holiday home in question - having historically treated any rental income as an exempt supply (not subject to GST).
Under these new rules, this formerly exempt supply may be immediately taxable (for GST), and could therefore need to be included as part of the person's taxable activity. Furthermore, including a holiday home as part of one's taxable activity suddenly becomes an alarming issue when that property is eventually sold, and GST needs to be returned on what is essentially a private asset sale.
Our advice is that unless you plan to run your holiday home as a short-term accommodation business, it is generally better not to own a holiday home in the same name/entity as a GST registered taxable activity.
Where taxpayers are actively using their holiday homes as "commercial" operations (with some personal use), they also need to be aware that the GST rules around mixed-use assets have also changed, impacting on the ability to claim GST on both the acquisition of the commercial holiday home and running costs, plus also the GST consequences upon the sale of such.
So as we head into the New Year, please bear in mind this cautionary tale and, if necessary, include sorting out the GST issues arising from your holiday home as one of your essential New Year's resolutions.
On behalf of the WHK, I would like to thank our readers for all of your positive comments over the past 12 months about "Sharp As Tax", and wish you a very merry Christmas.
• Scott Mason is a tax principal at WHK.
