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Exploring the complexities of GST on farmhouses and holiday homes

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The introduction of a new bill provides a welcome solution to the issue of GST application to the sale of farmhouses and holiday homes in certain circumstances. 

For many years it was a well-established practice to simply treat the farmhouse as not subject to GST because it had been used as the farmer’s private ‘family home’. However, this changed in 2020 when Inland Revenue (IRD) released an Interpretation Statement (IS 20/05) summarising its view of how GST applies to the sale of a private residence, when it is sold as part of a wider supply of land. 

As you can imagine, this was the equivalent of unceremoniously throwing a cat amongst the pigeons. In the Interpretation Statement, IRD concluded that if the farmer had claimed a portion of farmhouse expenditure for income tax purposes, it demonstrated that the farmhouse had been used to make taxable supplies and, therefore, the sale of the farmhouse would be subject to GST.  As the farmhouse is treated as a separate supply from the farmland – and is typically used as a residence by the purchaser – it doesn’t qualify for zero-rating and GST becomes payable at 15%. Similar complications arise in other scenarios, such as where a family house has a home office or workshop.

Similarly, it’s not uncommon for the family bach or holiday home to be rented short-term on sites such as Airbnb or Bookabach. If the income from rentals exceeds $60,000, the owner is required to register for GST. This can result in complex apportionment issues arising in relation to GST and ultimately means GST applies to the sale of the bach when it is sold, or when the renting activity ceases. People typically don’t mind paying GST on the rent, but they don’t want to see their personal asset being subject to GST on sale.  As a solution people opt to split the ownership of the asset and the rental activity. 

At the end of August 2022, the Minister of Revenue introduced the Taxation (Annual Rates for 2022–23, Platform Economy, and Remedial Matters) Bill into Parliament. This bill allows people to treat the sale of goods (including land) as an exempt supply. This is a welcome change that should allow farmers to get back to the status quo when selling their farmhouses, as well as eliminating the need for structuring the ownership of holiday homes. 

To qualify as an exempt supply under the proposed rule, the asset would have to satisfy the following requirements: 

● No GST has been claimed on the asset by the person, 

● The asset was not acquired or used for the principal purpose of making taxable supplies, 

● The asset was not acquired as a zero-rated supply. 

These requirements are all quite reasonable in both a farmhouse and holiday home scenario. 

However, before the collective sigh of relief, it’s worth noting another change – at least for bach owners anyway. Within the same bill is a proposal to apply GST to Airbnb income, along with income derived by Uber drivers, irrespective of whether the bach-owner or individual is GST-registered or not. The proposal is to deem these services provided through a ‘digital platform’, such as Airbnb, to be provided by the digital platform operator. This would mean accommodation marketplace operators, such as Airbnb, Bookabach, Holiday Home etc, would be treated as the supplier of each short-stay rental, and required to charge and return GST.

A mechanism is included to require the marketplace operator to pass back a flat rate GST credit to non-GST registered suppliers through the platform. The credit is based on an estimated GST claim on expenditure that could have been claimed if the owner was GST registered. 

We can see this playing out in one of two ways, either – 

1. The bach owner will receive less in the hand because GST needs to be deducted from the amount charged, or

2. The price charged to the bach user will need to be increased if the bach owner wants to receive the same net amount ‘in the hand’.

Without taking away from the solution to the farmhouse and bach issue, it does feel that we have a solution to a problem that should not have arisen in the first place, coupled with an extension of GST to income below the $60k compulsory registration threshold… think about that for a second.

The comments in this article of a general nature and should not be relied on for specific cases. Taxpayers should seek specific advice.

 

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