The inclusion of serviced apartments to the definition of residential land for the purposes of the bright-line test has brought with it uncertainty as to how these rules can be practically applied and has become a topic of many a heated debate in our office.

This is mainly because the term “serviced apartment” has not been defined in legislation in relation to the bright-line test.

However, a serviced apartment is defined in the GST Act as being a “commercial dwelling” if it is managed or operated by a third party for which services, in addition to the supply of accommodation, are provided and in which a resident does not have “quiet enjoyment”.

For income tax and GST purposes an apartment that does not meet all of the criteria of being a serviced apartment may still be a taxable supply if it is deriving income from carrying on the taxable activity of providing short-term accommodation.

By extending the definition of residential land to include serviced apartments, the bright-line rules have included what is typically defined for GST purposes as a commercial dwelling. And dwellings involved in the activity of short-term letting, which is also typically a commercial activity, are residential dwellings for income tax purposes under the bright-line rules.

What does this mean? Does the term “serviced apartment” relate only to apartments or properties that are part of a managed pool or managed by a third party? Or does it also extend further than this, to capture residential properties that are managed by owners and being utilised solely for deriving income from short-term accommodation, such as those listed on Airbnb.

‘An apartment that does not meet all the criteria of a serviced apartment, may still be a taxable supply if it is deriving income from the taxable activity of providing short-term accommodation’

What about the taxpayer who has more than one property that they are deriving income from for short-term letting? We have many clients that are registered for GST and are carrying on the taxable activity of providing short-term accommodation. Surely properties utilised in this way would not be considered to be residential dwellings?

Add to this that there is also a business premise exemption that states that residential land does not include land used as business premises. As an example to support this, Inland Revenue have cited that a property used in the taxable activity of a Bed and Breakfast, would be able to utilise this exemption in relation to the bright-line rules. Given this, if a taxpayer was utilising a property solely in the taxable activity of deriving income from short-term accommodation and providing other services such as furnishings, cleaning or Wi-Fi, would this property also be deemed to be their business premises in relation to that income and qualify for the exemption? Or would this be seen as taking an aggressive position?

Unfortunately, unless guidance is provided from Inland Revenue to assist taxpayers in interpreting how to apply these rules correctly, or the term “serviced apartment” is defined in relation to the bright-line rules, only time will tell.

If you own a serviced apartment or are in the unfortunate position of having to apply these rules to your own circumstances, feel free to contact Carole at Withers Tsang for a complimentary chat or email carolep@wt.co.nz

Carole and her team specialise in advising on property-related transactions, valuation and restructure services, and tax planning. Withers Tsang & Co Phone 09 376 8860, www.wt.co.nz