Selling a short-term rental: Will GST apply?

In certain circumstances, GST is not due on the sale of a property, even if it has been used for short-term accommodation (such as Airbnb), the income has exceeded $60,000 in any 12-month period, and/or the entity is GST registered.

Section 6(3)(e) of the GST Act 1985 has four parts:

• Parts 1 and 4: GST has not been claimed on the purchase of the property, either directly or through purchasing the property as zero-rated.
• Part 2: The goods were not acquired for the principal purpose of making taxable supplies.
• Part 3: The goods were not used for the principal purpose of making taxable supplies.

Principal Purpose

Previous public guidance on the meaning of “principal purpose” has defined it as the main, primary or fundamental purpose. This does not necessarily equate to a more-than-50-percent test.

During the time the registered person owned the goods, they cannot have been used by that person for the principal purpose of making taxable supplies. In other words, the primary use of the goods, from the time the person acquired them until their disposal, must be a non-taxable use, that is, a private or exempt use.

Overall, what does this really mean?

The easy part is Parts 1 and 4. If GST has been claimed on purchase, then GST will be due on sale (or when deregistering). There are some ways to reduce the GST in certain cases.

Parts 2 and 3, relating to principal purpose, are more complicated. The following case studies will hopefully help explain how these rules can apply.

Case study 1

Joe Bloggs buys a “holiday home” for $690,000 and does not claim GST on the purchase. He says that his long-term intention is to use it as a private holiday home. In the short term, he rents it as short-term accommodation on Airbnb until he is in a financial position to use it solely as a personal holiday home.

Joe advertises the property for rent throughout the year and manages to rent it for around 100–150 days per year. When the property is not rented, he sometimes uses it privately, for around 10–20 days each year.

This continues in a similar manner for around 10 years, until the property is sold for $1,150,000.

The income exceeds $60,000 annually, so Joe has had to register for GST. However, he has never claimed GST on the purchase of the property.

Joe would be caught under Part 3. The property has not been used principally for private purposes.

Joe would have to pay $150,000 GST on the sale of the property. He would also be able to claim $90,000 relating to the purchase of the property, resulting in a net GST cost of $60,000.

Case study 2

Joanne Bloggs is a GST-registered artist. She purchases a house as her personal home.

To earn some extra income to help with the bills, she rents out her sleepout on Airbnb.

Joanne earns around $20,000 of income each year and uses around 25% of the property for rental purposes. As Joanne is GST registered, she will have to return GST on this short-term rental income. She may also claim an appropriate proportion of the related expenses.

Option A

Joanne chooses to claim GST back on 25% of the purchase of the property.
In this case, because she has claimed GST, she will have to pay 25% of the GST on the sale of the property.

Option B

Joanne chooses not to claim GST on the purchase of the property. Her intention when purchasing the property was to use the house principally as a personal or family home. Each year, she rents out the sleepout on Airbnb, but the house remains principally her personal home.

Joanne will not have to pay GST on the sale of the property.

Option C – a twist on Option B

Following the circumstances in Option B, Joanne lives in the house for five years. She then moves to Bali for the island lifestyle and permanently rents the property on Airbnb. Six years later, 11 years after originally purchasing it, Joanne sells the property.

The property is no longer principally a personal home, so GST would be due on the sale.

Option D – a twist on Options B and C

Following the circumstances in Options B and C, what happens if Joanne rents the property for a shorter period? For example, the whole property is rented on Airbnb for two weeks after Joanne moves to Bali and is then sold.

At this stage, the property is still principally a personal home, so no GST is due on the sale.

If the property is rented for longer, the outcome will depend on the exact circumstances. If the property changes from being principally a personal home to a rental property used for short-term accommodation, the exemption from GST on sale will no longer apply.

Earning over $60,000 from a property

If a property earns more than $60,000 of income each year, it is unlikely that the property will be principally a private holiday home.

For example, if the rent is $500 per night, earning $60,000 would mean renting the property for 120 nights. It would be difficult to argue that this level of rental activity is only a secondary purpose or use of the property.

Getting advice before you purchase

There is a lot to consider when deciding whether you should register for GST for a short-term accommodation property.

A great option is to have a Property Advisory Meeting with Ross. This is best done as early as possible and, ideally, before purchasing a property. Ross can then also provide advice on the most appropriate ownership entity.

You can book a quick, free chat with Ross to discuss your situation, or book a formal meeting using the link below:

Get in Touch

Article by Ross Barnett

Disclaimer

This article is for general information only and is not intended as accounting, tax, or financial advice. You should seek advice from a qualified professional before acting on any information provided.

Any examples or figures are for illustration purposes only and should not be relied on for decision-making.