GST on mixed-use property
Question from Brenda updated on 18th February 2015:
Hi there, we are looking at a residential property which was a rest home. We are wanting to turn one 'wing' into four rental apartments and the balance into a bed and breakfast (B&B). We would live in the complex. We've been advised that there is no GST on the B&B portion (75%) but there would be on the balance. Why would we pay GST on the 25% residential rental portion? Also, am I right in assuming we could not claim any costs involved in the apartment conversions? What would the GST implications be if we were to do the whole complex into apartments and not have the B&B? The Inland Revenue Department's rules seem very confusing. On the IRD website it says the rental income is GST exempt in one section then in other it says we would pay GST? We are forming a company.
Our expert Mark Withers responded:
Dear Brenda, you can be forgiven for finding GST confusing on mixed-use properties. I'd need much more information to properly answer your question but will offer up some of the core principles for you to consider. The provision of residential accommodation in a dwelling is exempt from GST. However, where accommodation is provided in a commercial dwelling it is subject to GST. This can include rest homes, motels, boarding houses and B & Bs. We also have new compulsory zero rating rules that require land transactions between GST registered parties to be zero rated where the purchaser gives written warranties that they are registered, will use the property in their taxable activity and will not use the property as their principal place of residence. You should analyse this transaction by first understanding your vendors GST position and how they intend apportioning the supply between exempt and taxable supplies. The dwelling, for example, can be considered a separate supply despite being included in the overall transaction. New GST rules also allow for the apportionment of supplies to the extent that they are included in the taxable activity. Next, determine your own use of the property and how its use should be apportioned. This should then enable you to determine what portion is exempt and what portion included in the taxable activity. Then look to apply the compulsory zero rating rules to the taxable portion of the supply. Remember, as a buyer it’s always safest to negotiate on a GST inclusive basis but where the compulsory zero-rating (CZR) criteria are met the GST will be included at zero rather than 15%, preventing you from claiming a refund. You should seek input from a tax adviser in addition to your lawyer, these transactions can be very tricky to frame properly from a GST perspective. Don't take your tax advice from the estate agent either.
Mark Withers and his team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.