Property market takes another hit from GST changes

The proposals aim to reduce compliance costs for owners of holiday homes, home-stays, farm-stays and serviced apartments, and “are a step in the right direction for some small operators,” he says. However, the proposals may cause headaches for property developers, retirement villages and investors.

“An investor may now be faced with an additional up front 12.5% cost in the form of GST when a serviced apartment is acquired and property developers will no longer be able to market serviced apartments as being free of GST,” says Smith.

Currently owners of holiday homes, home-stays, farm-stays and serviced apartments can register for GST and claim back GST on associated costs, as these properties are generally regarded as “commercial dwellings”. The income derived from the property is then subject to GST at 12.5%, 7.5% or another composite rate.

In contrast, accommodation in a “dwelling” is exempt from GST and GST on associated costs cannot be recovered.

A proposed change in Inland Revenue interpretation will mean that owners of holiday homes, home-stays, farm-stays and serviced apartments will be outside the scope of GST. This is because the property will no longer be regarded as commercial dwellings.

Smith says this is a mixed blessing. “On the one hand this is good news as these owners need not register for GST and return GST in respect of their income. On the other hand, they will not be able to claim GST back on associated costs.”

Current owners registered for GST would normally be faced with a significant GST bill for the GST amounts already claimed back from the Government due to the change in treatment.

However, the Minister of Revenue has also announced a change in law so that owners who are already GST registered and have claimed back GST can continue with the past interpretation. The details of this legislation are not available at this stage.

“The Government has offered a sweetener in the form of not applying this interpretation retrospectively, which will please many current owners,” says Smith.

The changes will also impact retirement villages and property developers selling dwellings, such as serviced apartments. Smith cautions that the impact of the proposed changes will need to be carefully assessed so that the true cost of GST is known at the outset before any units are sold to investors. And these businesses are already subject to complex GST rules.

For example, currently the sale of a serviced apartment in a hotel or complex by a property developer to an investor may be free of GST in certain circumstances. This applies where a serviced apartment is sold as a going concern to a GST registered investor who leases the serviced apartment to a manager of the hotel or complex in which the serviced apartment is situated. The investor is required to account for GST in respect of the lease payments received from the manager. The manager then rents out the serviced apartment to the guest staying at the hotel or complex and GST is charged appropriately.

Under the proposed changes, the property developer will be required to charge GST at 12.5% and the investor may not be able to claim back this GST, as the investment may now be outside the scope of GST – for example, if only one or two apartments are held by the investor. Although the investor may not be required to charge GST to the hotel manager as the serviced apartment is no longer a commercial dwelling, the manager will continue to charge GST to the guest, as the manager will be operating a commercial dwelling.