Property problems: Industrial trust's sales tax on holiday home

Monday 14 June 2004

Q. I am the trustee of a family trust. The trust has industrial property income and is registered for GST. Several years ago the trust built a house to be used as a holiday home for the beneficiaries. The house was only for private use and did not produce an income, and therefore a GST refund was not claimed on the construction or maintenance cost. The trust now wishes to rent the property

By The Landlord

for short-term stays to produce income on which GST will be added. The beneficiaries will not use the property in the future as the trust has acquired another property for their use. It is intended to incorporate the rental income and GST from the house with other income and deduct any GST paid for management, repairs, etc. In the future, if the house is sold for a much higher price than construction costs plus GST, how does the trust address the issue of GST, i.e. does the trust claim all GST refund now on the cost of construction or have the house valued now and only pay GST on the increase in value when the house is sold?

A. For GST purposes, renting the house for short-term stays will mean it is a "commercial dwelling" and therefore the trust is correct in recognising that General Sales Tax will need to be accounted for on the rent receipts.

When a person acquires goods and services (on which GST was charged) other than for the principal purpose of making taxable supplies, no GST input tax credit may be claimed.

However, to the extent that those same goods and services are later applied in the making of taxable supplies, a GST input tax credit can be claimed based on the lesser of the GST inclusive cost of those goods and services or their open market value.

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