COVID-19: The GST impact of changes to your short-stay property

With COVID-19 restricting international travel and consequently having a devastating impact on the tourism sector, you may be re-thinking how you use your investment property to generate returns. Care needs to be taken as there may be GST costs to you for any such change, including the requirement to repay back some or all of the GST previously included in the original purchase price. If you have been using the property for short-stay rental, have registered for Goods and Services Tax (‘GST’) and have claimed input tax credits in relation to your property, you need to be aware of the GST consequences of these decisions. This article highlights some ways that decisions you make now on how your property is used may have some unforeseen GST consequences.

The change in use and concurrent use rules within the Goods and Services Tax Act 1985 were designed to ensure GST registered persons claim the correct amount of input tax credits over the lifetime of the assets held in their taxable activity. In practice they can be a complex set of rules to apply. In this article we address two key questions - what happens when you permanently change the use of a property and what happens when you use your property for both short-stay and longer term accommodation?

What happens when you change the use of a property?

There are rules that apply when you change your property’s use from taxable to non-taxable use partially or completely. These rules are complex and can require an adjustment calculation to be made every year where there has been a variation between the intended use and actual use of any particular asset. Where your actual use (being the proportion of taxable supplies to non-taxable supplies) is less than the intended use you will find yourself having to pay some GST back to Inland Revenue.

Change in use to long-term rental - one property of many

For instance, take a Trust that owns three Queenstown properties all of which were acquired for 100% taxable use (i.e. all rented out as short-stay accommodation) with full GST input credits claimed. Due to COVID-19, the Trust chooses to change the use of one of the properties to long-term rental, the second as a family Bach and then keeps the third property as short-stay accommodation. As the Trust still maintains their taxable activity of short-stay accommodation through the third property they will fall into the change-in-use regime. Under this regime the Trust over time needs to return the GST on the purchase price in respect of the properties that have changed use.

These calculations are complex and must be done on an asset-by-asset basis. Under these rules, considering the three Queenstown property example, there could be a significant amount of GST to be returned from the two properties which are now no longer being used for a taxable purpose (i.e. subject to GST).

Less than 18 month change in use to long-term rental – only property held

Ordinarily a taxpayer is required to de-register from GST when they cease their taxable activity and do not intend to carry on any taxable activity within 12 months following cessation. Inland Revenue have released a specific COVID-19 variation for the accommodation sector which extends the 12 month period to 18 months (where the use of the property changes to long term stays between 14 February and 31 October 2020).   

Taxpayers need to notify Inland Revenue of their situation for this extension to apply.

Take for example a Trust that owns one short term stay property in Queenstown.  While normally used as short stay accommodation, the Trust decided to lease the property to tenants from 1 May 2020 until 31 October 2021. As the lease is for 18 months and the Trust intends to use the property again for short stay accommodation from 1 November 2021 onwards, they should contact Inland Revenue using the short term rentals email and provide the relevant information so that they do not need to de-register for GST. As this extension only relates to de-registration, the Trust may still need to make some adjustments under the general change in use rules.

Permanent change in use to long-term rental – only property held

However, the situation is very different for a taxpayer that owns only one property and permanently ceases their taxable activity when they change its use to long-term residential with no intention to go back to providing short-stay accommodation.

This permanent change requires the taxpayer to de-register from GST (and notify Inland Revenue within 21 days of this change). This has a much higher immediate cash cost.  In the one of many properties example above, the repayment is of previously claimed GST input credits is staggered over time. Whereas in this example the amount of GST that’s needs to be returned immediately amounts to the GST component of the open market value of that property.

This means that in situations where a property may be sitting on a large market value capital gain (because of being owned for a number of years), the GST that will need to be returned may be substantial.

We note that there will be a number of other possible scenarios including those where use is fluctuating during the year depending on how things pick up, particularly in our key tourist areas.  Short term changes in use are also subject to the change in use regime but will result in smaller adjustment amounts. These rules are complicated and can require multiple adjustments.

What happens when you use a property for both short-stay accommodation and residential rental?

When a registered person simultaneously uses the same area of land during a period for making a mix of taxable and non-taxable supplies, this is known as concurrent use. It may be possible for a GST registered entity to fall within these rules if a property that had been rented on a short-stay basis is rented out under a residential tenancy (exempt supply), while still advertising the property as short-stay (taxable supply).

Take as an example a GST registered Trust purchased a $1,500,000 Queenstown property that until earlier this year used solely for short-stay accommodation. Because it was used for short-stay, the Trust claimed an input tax credit in relation to the purchase of the property and on its operational costs (cleaning, linen etc.). GST was then returned on the short-stay rental income. In early May the Trust decided to rent out the property residentially for a fixed period of three months (the tenants entered into a residential tenancy agreement). During this time, the property was still advertised on third party rental websites as available from the date that the tenancy is due to end.

The Trust has not returned GST on the rent charged to during the residential rental period as this is an exempt supply. In addition to this, under the concurrent rules a small amount of GST input tax claimed on the capital cost of the property would be repayable to Inland Revenue in the March 2021 return. Even if no GST was claimed on the purchase price of the property (because it was a compulsory zero rated commercial land purchaser from a GST registered developer), a further payment of GST could still be required based on the “nominal GST” of 15% on the purchase price.

Where to from here?

The overwhelming impact of COVID-19 was fast-moving in late March 2020 with many GST registered persons making swift decisions in April or May. If you are one of these people, the key dates to keep in mind here are 31 October 2020 and 31 March 2021 (being the end date of the first adjustment period). 

We recommend you review your investment properties to consider what GST you have claimed in relation to them, how they are being used and have prepared draft calculations well in advance of when they are due to be reported to Inland Revenue.  

If you want to take advantage of the Inland Revenue’s extension to the de-registration time period, you need to take active steps to notify Inland Revenue of this. Do not wait to pick up the phone as it is important that you know of the potential consequences of any decisions now so you can factor these into how you might use your properties for the remainder of the tax year. Any changes in approach could result in an unwelcome and costly GST bill. If you feel any the situations discussed above apply, please do not hesitate to reach out to your Deloitte tax advisor. 

The content of this article is accurate as at 25 August 2020, the time of publication. This article does not constitute professional advice. If you wish to understand the potential implications of current events for your business or organisation, please get in touch. Alternatively, our COVID-19 webpages provide information about our services and provide contacts for relevant experts who can help you navigate this quickly evolving situation.

26 June, 2020 by Sarah Kennedy, Nathan Lardner, Lachlan Havill, Business continuity

Sarah Kennedy

Sarah Kennedy

Sarah Kennedy is an Associate Director in the Tax and Private team, in Wellington. With a particular interest in indirect tax, she has a broad range of experience in both technical and process driven GST and FBT issues and opportunities. 

Nathan Lardner

Nathan Lardner

Nathan Lardner is a tax consultant, based in Wellington. His expertise is in payroll, indirect tax, international tax and corporate tax.

Lachlan Havill

Lachlan Havill

Lachlan Havill is a Consultant in the Tax and Private team, in Wellington.

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