Tax advice has to be accurate

Tax is complex and, at times, not totally logical or fair. Sometimes the combination of legislative changes and technological advancements can create a disconnect between "common knowledge" shared in pubs and clubs, and the technical tax reality.

One example could be the change in how property is being used, such as through Airbnb, and the tax consequences arising. As a result, we often hear about scenarios of people getting caught out in hindsight when they didn't appreciate they would be paying income tax or GST when a "residential" property is sold.

The Brightline Test taxes the sale of residential property if it is sold within two years (now extended to five years) of acquisition where it is not the main home of the taxpayer. This rule was justified as a mechanism to combat so-called property speculators who were reportedly using a perceived loophole to not pay tax.

The reality is it applies to more than "unsavoury" property speculators, especially given the five-year timeframe, as life happens. Accordingly, arguments are sought to fall outside of the rules. The issue is that there are only a few exemptions outside of the typical main home argument, being if the property is used predominantly as a "business premises" or considered farmland.

This is where we get to "pub quality" advice. You know, the type of tax advice you get from your mate's brother's builder's sort-of-accountant; fifth hand. We recently saw a case where the concept of "business premises" was considered by a "pub" adviser, which highlights some of the risks that taxpayers must contend with when seeking this type of support. The argument presented was that if a residential rental property was purchased in a company (which has a theoretical presumption of business), then the property could form part of that business, and could be considered a business premises (i.e. not be taxed under these rules).

Although "business premises" has not been defined for the purposes of the Brightline Test, some guidance can be found in the other land rules where it has been defined to cover land that is used as the premises of a business, and it was acquired for a substantial business to be undertaken from that land. Case law has rejected the notion this would not include a business of rental properties, as this largely falls into investment activity, rather than substantial business.

IRD advice to Government (during legislating the rules) was "business premises" exemption was intended to allow for property rented to a third party from which they conducted their business but was not intended to apply to property rented as residential rental property. Accordingly, despite the good intentions of the "pub advice", it is a rather tenuous argument to suggest a business premises would extend to a residential rental property in its own right.

Another area we often hear "pub advice" on is the GST implications that can arise when renting a property on Airbnb. The general issue is that the short-term rental of property can necessitate a person to be GST-registered if the gross rental from such an activity reaches $60,000 in a 12-month period. In Central Otago, it is not uncommon for such amounts to be derived.

The issue is that the vendor would be subject to handing over 15% GST on sale or cessation of the activity, which can be a fairly significant amount of leakage.

We have heard of "suggestions" for owners to enter into a standard long-term residential tenancy agreement with a property manager, who then has the right to sublet the property as a short-term rental. The argument being that if rent is derived from a long-term residential tenancy agreement it would be exempt from GST and therefore wouldn't count towards the registration threshold.

At first glance, this seems plausible, however, it misses one important characteristic: to be exempt in that the property must be occupied as a primary residence i.e. actually be used as a long-term residential property.

This simply does not exist if the property manager just continues leasing the property as a short-term rental.

This article is a reminder taxpayers need to be careful when taking advice on complex matters from uninformed sources, especially with property being a current core area of IRD focus.

Scott Mason is a managing partner and tax specialist at Findex (formerly Crowe Horwath).

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