With peer-to-peer accommodation websites such as Airbnb, Bookabach and Holiday Houses revolutionising how people provide and consume short-term accommodation, the IRD has thought it timely to issue a number of draft proposals setting out the tax obligations of renting out a home.
IRD is proposing the use of “standard cost” methods whereby providers of domestic accommodation will have the option of not returning income they derive if it does not exceed a deemed standard cost amount.
Standard costs mythologies are not new.
In several situations, the IRD allows standard costs to be used under current rules. However, IRD is revising the rates and the methodologies.
As is currently the case, providers will still be able to use an actual cost methodology where they return all the income and claim the expenses incurred in relation to providing the accommodation.
However, the standard cost methods provide an easier alternative because a taxpayer doesn’t have to work out their actual expenses, which often requires that some of the costs be apportioned between private and income-earning use.
As well as setting new standard rates and methodologies, the IRD has also issued a number of draft papers that clarify when and how the current rules will apply and also provide examples and guidance on how property related costs are to be apportioned between private and income earning uses.
The proposals set out the IRD’s proposed treatment of a number of short-term domestic rental scenarios, including:
Those who provide boarding services from their own homes to four or less boarders do not have to return the rent they receive from boarders if it is less than a $266 per week standard cost for each of the first two, and $218 per week for each subsequent boarder.
The IRD is proposing to lower the standard cost threshold to $183 per week for each boarder.
If a boarding service provider earns more than these new weekly standard amounts, the IRD is proposing to allow service providers to calculate an additional standard cost amount for capital costs (e.g. rates, mortgage interest, R&M) and transport costs incurred in relation to the provision of the boarding services.
Renting rooms – short-stay accommodation
People who rent out room(s) in their homes to guests for short-stays (no longer than four consecutive weeks) and not more than 100 nights in a year (counting each room that is rented out separately), may qualify to use “nightly” standard costs.
The nightly standard costs will be $50 per night per room where the provider owns the accommodation and $45 per night per room where they rent the accommodation.
These costs are a deemed average cost and factor in financing, rent, insurance rates as well as costs typically provided to short-stay accommodation guests, such as linen, power, telephone, internet, as well as advertising and host service fees.
If a person provides both a boarding service and short-stay accommodation, they will be precluded from using the standard cost option in both cases.
Occasionally renting whole home
If a person has a property that is sometimes rented out for short-stay accommodation and also sometimes used by the person themselves, then one of two calculation methods will apply depending on the period the property is unused during a year.
If a property is unused 62 days or more, then the mixed-used asset rules will generally apply.
Under these rules all the income is returned, however the proportion of costs that may be deducted in respect of the period the property is empty is reduced over the standard tax rules that apply if the property is not considered a mixed-use asset.
Under the standard tax rules all income is returned and a greater tax deduction for costs is allowed over the mixed-use asset method as costs related to the period that the property is unused, but nonetheless still available for use, are generally able to be claimed.
A person will not have to return income (but can’t claim expenses either) if they have a mixed-use asset that earns under $4,000 of income in the year.
Standard cost methods generally
The IRD is proposing that the new standard cost methods will only apply to suppliers of domestic accommodation who are natural persons.
Property may be owned by a trust if certain criteria are met.
Another requirement is that the accommodation is not provided as part of a GST taxable activity.
Once the consultation process is concluded and the IRD’s position is finalised, the new rules will apply from the income year beginning 1 April 2019.
The comments in this article are of a general nature and should not be relied on for specific cases, where readers should seek professional advice.