Tax threat over serviced apartments

The cost of serviced apartments could rise if a new interpretation by Inland Revenue of the GST law stands.

The tax department has issued a draft interpretation statement on the GST treatment of serviced apartments, farm stays, home stays and short-term holiday homes, which says they will not in most cases be classified as "commercial dwellings" and will therefore fall outside the GST system.

Under the present interpretation of the law, a property developer can sell an investor a unit in a serviced apartment complex, coupled with an agreement to lease it to the property manager, without charging GST.

It is zero-rated because it is classed as the transfer of a GST-taxable activity as a going concern.

But under the proposed new rules the investor will not be able to register for GST and the GST chain will end with the developer/vendor, who will either have to charge 12.5 per cent more or take a hit to his profit margin.

Many hotel developments have been structured in this way. But investors who have already bought and are registered for GST will have their present position protected.

Revenue Minister Peter Dunne said the Government would introduce a law change that preserved the status quo for owners who had registered for GST and claimed input tax credits for expenses associated with the accommodation before the new interpretation was completed.

"This means they will be able to deregister in the future in accordance with current interpretations of the law, and thus postpone any financial consequences which might otherwise arise from the new interpretation."

If the GST-registered owners of serviced apartments and farm stays were forced to deregister immediately they would be deemed to have sold the assets and would have to account for GST on their market value.

Under the grandfathering arrangement Dunne has promised they will still have to account for GST when they do sell, or deregister for some other reason.

But the Government does not want to force people out of the GST system at a time when the appreciated market value of their property might be such that they would have to sell it to pay the GST due when it is removed from the GST tax base.

Ernst & Young GST specialist Paul Smith said it was good that the kind of retrospective change that had hit the tourist sector in the past would be avoided and that many small accommodation operations would avoid the compliance costs associated with being registered for GST.

But in the future they would not be able to claim back the GST on the costs of developing such facilities either. And it could have complex effects on the economics of retirement villages.

Deloittes partner Peter Felstead questioned the analysis underlying the reclassification of home stays and farm stays from commercial dwellings to just plain dwellings, which relies on what the original buildings were designed for rather than the activities undertaken in them.

The same dubious logic could be applied to residential homes converted to GPs' consulting rooms, he said.

People have until December 22 to make submissions to the IRD on the draft interpretation.

"People should make submissions," said Felstead. "I don't think they have got it right. They are trying to fix one problem but it will create issues with other applications of the law."

The perceived problem was people claiming GST credits on what the IRD regarded as private or domestic assets - not so much the operating costs, but the up-front purchase price of a significant capital asset.