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BUSINESS ADVICE •  8 DECEMBER 2021 • 9 MIN READ

Airbnb income and how to handle it

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As Airbnb (or other private property rental sites like bookabach*) is becoming more popular, the tax consequence of running one needs to be carefully considered.

There are different rules for both income tax, GST, whether it’s a separate holiday home/bach, or your permanent residence. A few other aspects come into the mix. We have other articles covering the income tax and GST business owners should know.

It’s a little confusing so we’ll try and explain on the tax on rental income in New Zealand.

*For the ease of reading, we’ll refer to this as Airbnb income for the rest of this article.

Income tax

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?

  • If the property is used only as an Airbnb and there is no personal use, expenses can be deducted in full.
  • If the property is also used privately and is vacant for 62 days or more, Inland Revenue classifies this property as a Mixed Use Asset (MUA). This is where it gets tricky.

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:

  • The number of nights used as an Airbnb
  • Nights used personally by your or related parties
  • Nights where friends and family pay less than 80% of the market rental
  • Property expenses

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!

What can you claim if the Mixed Use Asset rules don’t apply?

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.

Actual cost method

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.

Short-stay standard-cost method*

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.

Ownership Structures

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.

GST

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:

  • Family and friends stay for a reduced amount (or for free) needs to be considered as income for GST purposes. How would this work practically? If you’re close to the GST threshold of $60,000 and your family and friends stay there for free or at a discounted price, you could be tipped into registration without meaning to be!
  • If you’re not GST registered from your sole trader activities, the Airbnb income is added to your other taxable activities and could result in revenue of more than $60,000.

GST on the property purchase and sale

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:

  • You can claim GST on the purchase price and get a nice refund now…but you need to pay GST on the property’s market value once it’s sold or you stop being an Airbnb; or
  • Once the property is sold, or you stop being an Airbnb, you can do a ‘wash up’. The GST on the purchase and market values are determined, then you just pay the difference. No big refund up front, but no looming GST bill to pay at the end

GST on expenses

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.

Example

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:

  • GST on the commercial Airbnb income for the past three years – $23k.
    • You’ll be able to claim GST on expenses incurred, but it won’t be significant
  • GST on the change in use from commercial to residential sale price ($59k) less GST on the purchase price $51k = $8k

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

Impact of Covid

Property is vacant

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

Undertaking a taxable activity on a continuous and regular basis, involving, or intending to involve, the supply of your property as short term rental accommodation.

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.

Changing permanently to residential

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.

Changing temporarily to residential rental

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.

De-registering from GST

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

Other Considerations

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

  • Rates and consents – local councils may impose additional requirements for visitor accommodation.
  • Insurance – standard house and/or contents insurance does not cover Airbnb type rentals.
  • Lending – running Airbnb rentals may impact on bank lending so you need to discuss further with your bank.

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!

Who are Beany?

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. 

Tess, Problem Solver

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Sue de Bièvre

Beany Founder

Beany CEO and Chartered Account. An intrepid entrepreneur and feminist with a penchant for disruption; spotting problems and rolling her sleeves up to fix them makes Sue tick.

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