Taxing flatmates vs boarders
Question from victoria updated on 24th February 2017:
My 19 year old University student daughter is buying a property and plans to rent out the second bedroom, I have read that if she does this she doesn't have to pay tax if the person pays less than $254 per week. We anticipate the rent for the second bedroom to be $230. Does this also apply if her trust buys the property for her - ie: the property is in her trust's name?
Our expert Nick Ashford responded:
Your question relates to boarders and flatmates. There is a difference between a boarder and a flatmate. Essentially, you feed a boarder while you just share space with a flatmate.
The weekly standard cost calculation you refer to only relates to boarders, not flatmates. For flatmates you use normal rules: rental income less allowable costs even with one flatmate. For boarders you have a choice of two methods: actual cost (similar to flatmates) or standard cost. The standard cost method has two components: weekly standard cost and annual capital cost. The weekly standard costs changes each year. In 2016, the weekly standard cost is $257. If the boarder is paying less than this there is nothing to declare and no loss to claim. If your income is over the weekly standard cost you must then apply the annual capital standard cost. This involves a formulae based on using your home to provide boarding services.
Where the property is owned by a Trust things differ again. This is because the IRD consider the person to be providing the boarder services your daughter, not the trustees of the trust. The first component of the boarder calculation is the same – ie: determine if the rent earned is less than the weekly standard cost. If it is, you are done. If it isn't, you need to apply the annual capital component. But, in this situation, you can only use the rent your daughter pays to the trust in the calculation. If she doesn't pay anything the tax will be higher.
It may be of use to know that IRD publish a guide on this issue: http://www.ird.govt.nz/forms-guides/number/forms-1000-1099/ir1037-guide-boarders-flatmates-tenants.html
Nick Ashford and the team at Withers Tsang & Co specialise in advising on property related transactions, valuation and restructure services and tax planning.