Airbnb income and how to handle it

All income derived from Airbnb (tax on retal income) is taxable and should be declared as income on tax returns. That’s the easy part.​

The question then arises is – what expenses can be claimed?​

Your property incurs expenses – electricity, rates, mortgage interest, repairs, maintenance, etc. We need to figure out how the expenses are to be apportioned between private and business use.​

To work out the apportionment, you need to know the following figures:​

Now – we could give you a complicated formula, but the IRD has a very useful Mixed Use Asset Calculator. Respond to the questions and include the figures above. No calculator (or tablet, or smartphone) needed!​

This would be the case if you rented out part of your personal residence as an Airbnb. The property will be occupied for the full year (by you) – so the 62 non-use days described above won’t be applicable.​

A fair and reasonable approach needs to be used. The courts have accepted a floor area apportionment as being reasonable (similar to use of home office claims), taking into consideration the actual occupancy use. These would need to be looked at and calculated on a case-by-case basis.​

A nice exception offered!​

Here, you don’t need to gather all property expenses and work out the proportion to claim if you're claiming for taxes on rental income (e.g., Airbnb).​

The simplified method is where Inland Revenue says that the first $xx of rental income you receive is exempt from income tax.​

In 2021, the rate was $52 per night. This means that the first $52 isn’t taxed. The difference between the actual rate you charged and $52, is the income to be declared. ​

For example, if you charged $120 per night, you would declare only $68 per night as rental income ($120 less $52). No further expenses can be claimed though.​

* There are certain criteria as to whether the short-stay standard-cost method can be used. If you don’t meet them, then you need to use the actual cost method.​

What about if the property was owned in a Partnership or Trust (by partnership we mean a registered partnership with the IRD not joint ownership)? How would this impact for income tax and GST?​

The answer – income tax would stay the same but for GST purposes, all nights stayed by partners or associates of the trust would be deemed to have taken place at market value – this could easily take you above the GST threshold without you actually having received much Airbnb income.​

Operating an Airbnb, in the majority of cases, will fall under the rules for Commercial Dwellings for GST – similar to a Bed & Breakfast.​

This means that if taxable income exceeds $60k you must be registered for GST. You need to be aware that:​

Read more: Registering for GST​

As mentioned above, your income from Airbnb and your other taxable activities could become higher than $60,000.​

Yes – you must register for GST and account for GST on rental income and the expenses, and that’s straight-forward. But wait for it…​

GST on the property purchase and property sale needs to be accounted for…even if it wasn’t the intention to offer Airbnb accommodation at the time you bought it!​

There are two options:​

GST is 100% claimable if the cost directly relates to the Airbnb income.​

If the property is Mixed Use Asset, the costs must be allocated as private and business in the same manner as income tax described above. GST is only claimable on the business portion.​

This calculation is quite complex, so most choose to have the final adjustment worked out when the financial statements are prepared each year.​

You purchased a private bach three years ago for $395,000. It’s used as an Airbnb and generates $40,000 in a year of income.  You usually let it out at $500 per night. Your family and friends stay there for 41 days in one year for free. The current market value is $450,000.​

You decide to stop renting it out because it’s not worth the hassle. You decide to keep it as a family holiday home.​

Rental Income = $40,000 (80 nights at $500)
Deemed Rental Income = $20,500 (41 nights at $500)​

Total rental income = $60,500 – which would be declared for income tax ​

Inland Revenue sees that your taxable activity has generated $60,500 for three years and you should have been GST registered. Now they want:​

This comes to approximately $31k GST owed to the government. A one-hour chat with your accountant will be worth it!​

In order to be registered for GST, you need to be​

So – if your property is vacant, are you still undertaking the taxable activity on a continuous basis? Should you be de-registered? Good questions.​

Inland Revenue could enforce GST-deregistration, which has HUGE impact – the main one being that you’ll need to pay GST on the current market value of the property (or portion of the property) being used as an Airbnb.​

If the property is worth $1.8m, you’re looking at paying $235k to the IRD. That’s just GST.​

If you’ve decided to use the property for long-term residential rental permanently, the switch is much clearer than temporarily changing.​

A long-term residential rental is considered exempt from GST and therefore, if a person was to move from short-term to long term residential rental they will need to account for GST on that change in use. This will either be by way of de-registration event as noted above, or a change in use (if they still undertake another taxable activity).​

There might be some adjustments or additional claims that could be available in such a case to help offset the likely cash cost of this transition, so it is important that you talk to your advisor to manage this process.​

GST applies for commercial properties (Airbnb), but does not apply to residential rental income and expenses​

We’ve had clients changing the use of the property from an Airbnb (short term accommodation) to a residential rental (long term accommodation) due to Covid. There were only a few domestic bookings for the Airbnb, and even less from international visitors. Until Airbnb business picks up, some owners are using the property as a residential rental to cover costs.​

This is a precarious situation and could result in Inland Revenue arguing that the taxable activity of operating a commercial property no longer exists – the taxable activity is now residential rental, which is not subject to GST.​

This would require GST de-registration. However, there are arguments that the activity is continuing, with any residential rental only being temporary and does not amount to a 100% change in use or cessation of the taxable activity. Instead, the business’ GST registration should continue, with adjustments for any residential activity.​

There isn’t going to be a ‘one-size fits all’ solution. Inland Revenue’s position may change depending on supportable facts.​

If you are in this position, it is imperative that you contact Beany to assist with your situation and what you need to do.​

Do not de-register your Airbnb business from GST until you have spoken with an accountant or tax advisor (e.g., Beany)! ​

It was all unicorns and rainbows when you claimed GST on the original price of the Airbnb and received a great refund. Now you need to pay back the GST – not on the original price, but on its sale price / market value. ​

If you’re looking to exit the Airbnb business, consider selling the property as an Airbnb business to another party as a going concern*. If the buyer and seller are both GST-registered, it may be possible to zero-rate the transaction.​

* Going concern – the business continues as operate as normal, but the ownership changes​

Read more: Special transactions on GST​

By using your property to derive income there can be other issues that need to be considered:​

As we mentioned – it’s pretty complex, and incredibly important to get your head around before you list your property on a website!  Our advice, as always, is to speak to Beany and get some direct information that is pertinent to your situation before you load up your property for short stay rental!​

We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant would. ​

We have a dedicated team of remote accountants to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today. ​