GST on apartment rent?

Question from Rebecca updated on 12th April 2013:

I own a number of residential investment properties, including an apartment in a CBD building in Auckland. I own all of those properties in my own name and I'm not GST-registered. The Auckland apartment building contains both a hotel operation and owner-occupied apartments. When I bought the apartment it was owner-occupied. After purchasing the apartment I leased it to the hotel management company for three years, to be put into the hotel pool. Each month I receive a guaranteed minimum rental payment from the lessee/hotel. The rental statement that I receive from the hotel operation each month shows that the rent contains a GST component of 12.5%. Do I need to treat that income differently from the rental income that I receive from my other properties?

Our expert Mark Withers responded:

Fundamentally, GST is a transactional tax on the supply of goods and services. Only people who are GST registered are entitled to charge GST on supplies. The supply of accommodation in a commercial dwelling does constitute a taxable activity for GST but registration is voluntary if turnover is below $60,000 per annum. To answer your question it is necessary to understand the chain of supplies. The hotel management company will be correctly GST registered and will be charging guests GST on their stays in the apartment. However, where you are not GST registered there should be no GST charged by you on the lease payment you collect from the management company. It sounds to me like the management company has assumed you are registered and is paying you GST on top of the lease payment in error. There are probably a couple of options to resolve it. Either approach the IRD and advise that you should now be voluntarily registered with the registration backdated. This will mean passing the GST you have collected to the IRD and seeking to claim GST input tax on any supplies you have made. This may include the purchase of the apartment itself in certain circumstances. Alternatively, advise the management company that they have added GST to the lease payments in error and return the GST to them, they in turn will need to make a voluntary disclosure to IRD and repay the input tax they have claimed on the lease payments to you. One thing is certain though, the GST you have collected is not your money and is not your income. The GST rules have recently become even more complex with the introduction of compulsory zero rating of land transactions between registered parties. The apartment market is the most challenging of all where there is a real mixture of registered and unregistered owners all conducting similar business.

Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.

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