Tax implications of Airbnb (short-term accommodation) rental income
UPDATE June 2023: See below for interest limitation rules
Are you one of the many thousands of New Zealanders who are generating income through short term rental accommodation platforms like Airbnb, bookabach and holidayhouses.co.nz? Whether you are renting a guest room in your home as a side-hustle, or you rent out your family bach when it’s not in use, or you have a fully-fledged holiday home rental business, you should acquaint yourself with the tax implications of income earned.
We often find that the taxation rules for holiday let income is misunderstood so here we walk through a few basics.
Tax is payable on income earned
When you rent out all or part of a residential property for short-term accommodation, you need to keep records of all income earned and declare it in your income tax return, subject to some limited income exemptions.
The good news is that you can claim deductions for expenses incurred, for example, rates, insurance, cleaning and advertising. You will need to keep records of the expenses you claim.
Special tax rules apply to calculating income and expenditure from short-term rental accommodation depending on the type of property (for example, renting out a room in a house, whole house, sleep-out, cottage or second home etc) and its use (full-time use versus mixed use).
Costs that are solely related to renting out the dwelling are fully deductible. Costs that are solely related to your private use of the dwelling are not deductible. Other costs are partly deductible – the deductible amount is based on the number of rental nights relative to the total number of nights the dwelling is used and/or the floor area of the rented space relative to the private portion of the house.
Interest limitation rules
This information was added in June 2023:
The IRD has recently issued an interpretation statement to explain how the interest limitation rules apply to properties rented for short-term stays such as via Airbnb or similar.
The statement explains that the rules differ whether you are renting a room in your home, another dwelling on the property of your home or an entire home. What you can claim also depends on the structure of your loans – do you have one loan for your main home and the second dwelling or are the loans separate? The rules are complex and fact specific. We recommend seeking the advice of an accountant when filing the tax return for your short-stay accommodation.
See the interpretation statement here.
GST and short-term accommodation
Unlike long-term residential rentals, income earned from short-term accommodation is a GST activity. You’ll need to register for and file GST returns if your short term rental turnover is over $60,000 from all GST activities. Turnover includes gross rental and business income.
If you’re registered for GST, you can claim the GST on expenses incurred for the rental income. Mixed asset rules may apply if not all of the property is rented out, or if it is rented only part of the year.
Claiming GST on a property acquisition and expenses may seem like a great option however this means that the subsequent on-sale of the property will be subject to GST which could be substantially higher than the amount claimed if the property has appreciated.
You must return GST output tax when you either:
- sell your residential rental property
- change its use from GST taxable to non-taxable (exempt).
An example of change of use would be when you go from short-term renting (GST taxable) to long-term renting (non-GST taxable).
Betsy owns a bach in the Coromandel which she rents out when it’s not being used by family. She bought the bach in 1987 for just $87,000 but it is now worth approximately $1.3 million. Initially she earned $30,000 per year on short term accommodation sites Airbnb and Holidayhouses.co.nz. Over time, the property becomes more popular and the income she earns from the bach increases to over $60,000 per year. Betsy’s accountant informs her that she now needs to register for GST, start charging GST to holiday renters and file GST returns. She will be able to claim a portion of the house for GST but she will also be liable for GST on the full sale price including the $1M+ capital gain if she decides to sell the property in the future or stops using it for a GSTable activity.
Inland Revenue keeping track online
The information about who is providing holiday and short-term accommodation services, and how much they are charging, is readily available online through the booking sites. This makes Inland Revenue’s job easy – they can see who is including income from these services in their tax returns and who is not.
Something else to note is that Inland Revenue has signalled a change to GST rules for short-term accommodation providers and other online ‘sharing businesses’. IRD is concerned many of these businesses might be operating below the threshold to register GST and collectively they are potentially unfair competition to commercial GST registered businesses. Thought is being given to lowering the GST threshold for these types of businesses.
One of the challenges for these businesses is determining tax-deductible costs and a possible proposal is to have a standard cost for those who earn their income in this way. This might be a better alternative to making adjustments for private use.
We can help
There are many nuances and pitfalls to be aware of around GST applicability and income tax calculations, so it pays to check with your accountant on how to manage these. We are specialists in accounting for rental properties. If you would like help in this area get in touch with us.