Chapter 9 - Accommodation

9.1 In October 2006, Inland Revenue released a draft interpretation statement about the exemption of GST for accommodation provided in a dwelling.[69] The draft statement set out the Commissioner’s preliminary, but considered, interpretation of the relevant provisions in the GST Act concerning the supply of accommodation in a “dwelling” or in a “commercial dwelling”.

9.2 Inland Revenue received a number of comprehensive submissions on the exposure draft, many of which requested that the policy underlying the GST treatment of accommodation be reviewed.

9.3 Most submissions were concerned that the current legislative framework did not give taxpayers enough certainty about when the supply of accommodation should be treated as a taxable or exempt supply. The correct treatment of small-scale or non-commercial activities involving the supply of accommodation was also raised in submissions.

9.4 As part of the normal consultation process, the Office of the Chief Tax Counsel has reconsidered the draft statement in light of the submissions received. In response to these submissions, officials have reviewed the policy underpinning the GST treatment of accommodation. This chapter suggests two options that would clarify the boundary between taxable and exempt supplies of accommodation. The treatment of small-scale or non-commercial accommodation is also discussed.

9.5 Work on the exposure draft is not being advanced for the present, to provide an opportunity for the options presented in this chapter to be developed. It is likely that the suggestions in this chapter, if implemented, will largely supersede the draft statement.

Policy intent as reflected in the GST Act

The boundary between taxable and exempt supplies of accommodation

9.6 When accommodation is supplied by a GST-registered person, the GST Act determines which supplies should be treated as exempt and which should be treated as taxable by using two definitions – “dwelling” and “commercial dwelling”.

9.7 Accommodation provided by GST-registered persons is generally taxable unless it is expressly treated as an exempt supply.[70] Section 14 exempts the supply of accommodation in a dwelling. The exemption is reinforced by section 6(3), which removes from the definition of “taxable activity” any activity to the extent that it involves making exempt supplies. Persons engaged in activities that entirely involve making supplies of residential accommodation are unable to be registered for GST.

9.8 Accommodation of this nature was described in the White Paper as “residential rental accommodation”[71] and was not included in the GST base because of concerns if GST applied to rents, that it would give owner-occupiers of residential dwellings a tax preference over tenants who reside in rental properties.

9.9 The exemption for accommodation provided in a “dwelling” is determined by reference to the use of the dwelling and applies if the purpose of the accommodation is to provide a residence or abode to an individual.

9.10 “Short-term accommodation”, as described in the White Paper, on the other hand, is included in the GST base. That is, the services associated with providing short-term accommodation are taxable. This policy is encapsulated in the definition of “commercial dwelling”, and special provision is made if the accommodation exceeds four weeks by limiting the application of GST to goods and services that are ancillary to the provision of accommodation.

Commercial dwellings

9.11 The GST Act defines the term “commercial dwelling” as:[72]

“(a) Any hotel, motel, inn, hostel, or boardinghouse; or
(b) Any camping ground; or
(c) Any convalescent home, nursing home, rest home, or hospice; or
(d) Any establishment similar to any of the kinds referred to in paragraphs (a) to (c) of this definition;—
but does not include—
(e) A hospital except to the extent that that hospital is a residential establishment:
(f) A dwelling situated within a retirement village or within a rest home, where the consideration paid or payable for the supply of accommodation in that dwelling is for the right to occupy that dwelling:”

9.12 The supply of accommodation in a commercial dwelling is not exempt from GST predominantly because goods and services other than accommodation are likely to be provided. Operators of commercial dwellings are therefore treated in the same way as other businesses.

9.13 Long-term accommodation (accommodation that exceeds a period of four weeks) in a commercial dwelling is taxable, but the value of the supply is reduced.[73] The purpose of the valuation rule is to recognise that the supply of this type of accommodation could, in principle, be similar to the supply of residential rental accommodation. Therefore supplies of “domestic goods and services”[74] in these establishments, and defined as “the right to occupy” – including the supply of cleaning and maintenance, utilities and chattels – are taxed at up to 60 percent of the normal taxable value.

9.14 Operators of commercial dwellings therefore do not have to incur the otherwise substantial compliance costs associated with apportioning the taxable and potentially exempt components of providing long-term accommodation, but can still preserve their input tax entitlements.

Problems with the current GST treatment of accommodation

The taxable/exempt boundary

9.15 Following concerns raised in submissions in response to Inland Revenue’s exposure draft, we have reviewed the legislative framework governing the GST treatment of accommodation. The problem is how the GST Act should define the boundary between taxable and exempt accommodation so that the various policy objectives described in Chapter 1 can be met with as much clarity and certainty as possible.

Small-scale or non-commercial activities involving the supply of short-term accommodation

9.16 We are also concerned that the current GST treatment of accommodation may be causing some taxpayers to GST-register activities that are of a minor nature, either because of uncertainty or because of the ability to deduct input tax. Providing an input tax deduction in connection with the private use of goods and services is inconsistent with the objective of taxing final consumption.

Options being considered

The taxable/exempt boundary

9.17 The current legislation governing the supply of accommodation could mean the application of GST is based on the functional nature of the premises in which the accommodation is provided, rather than on the intention of the supplier and the recipient in regard to the use of the property.

9.18 Consistent with the objective that GST applies to the widest range of goods and services supplied, the exemption for accommodation provided in a dwelling should be narrowly defined. The definition should apply only to situations where there is a reasonable level of substitutability between renting and owning a home. This substitutability is more appropriately based on the use of the accommodation rather than the functional nature of the premises.

9.19 In recent years, there have been observable changes in the way tourist accommodation is provided in New Zealand, including greater demand for “boutique” or luxury accommodation provided in stand-alone dwellings. This would again support a test based on the use rather than the function of the premises. In these situations, the use of the accommodation is generally short-term rather than residential rental accommodation. Excluding this accommodation from the GST base because of its function would affect the entitlement to input tax deductions and would be inconsistent with the principle of the GST system not being a direct fixed cost on business.

9.20 Two options are suggested to help define the taxable-exempt boundary for accommodation. These options start from the viewpoint that the accommodation is supplied as part of a taxable activity, unless the accommodation is expressly exempt.[75]

9.21 Both options respond to changes in the way that tourist accommodation is currently provided in New Zealand. The options recognise that boutique or luxury accommodation provided in stand-alone dwellings competes against more traditional forms of commercial accommodation such as hotels, motels and camping grounds.

Option 1

9.22 The first option would involve making relatively minor changes to the current terms “dwelling” and “commercial dwelling”.

9.23 The definition of “dwelling” could be revised so that it is defined by reference to the residential use of the accommodation instead of as a “place”.

9.24 The definition of “commercial dwelling” could also be amended by making specific reference to a greater range of premises in which short-term accommodation may be supplied (such as bed-and-breakfasts, serviced apartments and homestays or farmstays). This could be achieved by amending the list of premises included in the definition of “commercial dwelling” and inserting descriptive criteria to cover accommodation that is not expressly provided for in the list but is nevertheless short-term.[76] The problem with this type of schedular approach is that:

• the policy objective can become obscured by the meaning or characteristics of the items listed in the definition; and
• the list could start to become less relevant as a result of market-place changes, which could result in inappropriate omissions or inclusions in the GST base of certain supplies of accommodation.

Option 2

9.25 A second option would involve replacing the current legislative framework with terms that are more descriptive of the normal use of the premises. For example, the term “commercial dwelling” would be replaced with the term “guest accommodation”. Accommodation provided in a hospice, rest home or similar – but not including a hospital or a dwelling in a retirement village – would be treated as “care accommodation”. The supply of “guest accommodation” and “care accommodation” would be taxable.

9.26 The treatment of long-term accommodation exceeding four weeks either as guest accommodation or care accommodation would broadly remain the same as it is currently under the term “commercial dwelling”. Long-term stays in hospitals (excluding those that form part of a “residential establishment”) would therefore continue to remain outside the scope of the reduced valuation rule. Hospitals have a different function from providing accommodation and would therefore be excluded.

9.27 “Guest accommodation” would be given its ordinary meaning and would broadly encompass situations when hospitality is extended to an individual. The term would imply that the provider of the accommodation has greater control over the use of the premises compared with a tenancy situation. Although “guest accommodation” will not be extensively defined in the GST Act, it would generally extend to accommodation in the types of premises currently included in the definition of “commercial dwelling”.

9.28 “Care accommodation” would include accommodation that is connected with the services provided within a hospice, rest home, convalescent or nursing home. Accommodation provided in a retirement village or complex would also be included, with the exception of the provision of residential rental accommodation in such a village or complex.

9.29 “Care accommodation” would also include any “residential establishment”. Residential establishments are facilities that provide an established community for individuals to whom “domestic goods and services” are supplied. The current requirement that 70 percent or more of the individuals reside or are expected to reside for four weeks or more and receive “domestic goods and services” would be retained.[77]

9.30 Exempt accommodation supplied to an individual would be described as “residential accommodation”, and would broadly follow the suggested change to the definition of “dwelling” described under option 1. The intention, however, would be to ensure consistency with the terminology suggested under option 2.

9.31 Table 4 illustrates the scope of the terms suggested under option 2.

Table 4 - Suggested GST Treatment of Various Types of Accommodation

Description	Includes	Application of section 10(6)	Does not include
Residential accommodation	Any premises used predominantly as an abode or residence by an individual.	N/A – supply is exempt from GST.	Guest accommodation or care accommodation.
Guest accommodation	Accommodation provided to guests on any premises.	Applies from the 1st day after the fourth week of a continuous stay.	Care accommodation.
Care accommodation	Accommodation provided in a convalescent home, nursing home, rest home, hospice or retirement complex and includes a “residential establishment”.	Applies from the 1st day after the fourth week of a continuous stay.	A hospital not included in a “residential establishment” or guest accommodation. Residential rental accommodation supplied in a dwelling situated within such a facility, home or complex.

Small-scale and non-commercial activities involving short-term accommodation

9.32 The options described in this chapter may still result in some uncertainty about when activities involving the supply of accommodation should be treated as taxable supplies. This uncertainty could lead to decisions to register for GST to avoid the possibility of shortfall penalties and use-of-money interest when the activity is of a very small-scale nature or non-commercial. It could also lead to a greater number of GST registrations in order to obtain input tax deductions, and so doing, create the requirement to make regular and ongoing change-in-use adjustments for any private or non-taxable use.

9.33 For these reasons, we suggest excluding from the definition of “taxable activity” activities involving the supply of commercial accommodation (either in a “commercial dwelling” or as “guest accommodation”) to individuals when the taxable supply from these activities is less than a specified threshold – for example, $10,000 in any 12-month period (including the relevant current taxable period). Affected supplies would be treated as not being a “taxable activity” or an excluded part of a “taxable activity”. Submissions are invited on where the specified threshold is best set and whether there are any competition concerns associated with introducing an explicit threshold of this nature. The measure would not apply to care accommodation.

9.34 Table 5 illustrates the range of possible outcomes that could apply to businesses that supply accommodation when making the decision whether to register for GST under the options presented in this chapter.

Table 5 - Decision Matrix for Registering for GST

	Option 1		Option 2
Taxable supplies in any 12-month period	Activity involves the supply of accommodation in a “commercial dwelling”	Activity involves the supply of accommodation in a “dwelling”	Activity involves the supply of “guest accommodation”	Activity involves the supply of “care accommodation”	Activity involves the supply of “residential accommodation”
Over $40,000	Required to register for GST.	Unable to register for GST.	Required to register for GST.	Required to register for GST.	Unable to register for GST.
Between $10,000 and $39,999	May voluntarily register for GST.	Unable to register for GST.	May voluntarily register for GST.	May voluntarily register for GST.	Unable to register for GST.
Under $10,000	Unable to register for GST or required to deregister for GST.	Unable to register for GST.	Unable to register for GST or required to deregister for GST.	May voluntarily register for GST.	Unable to register for GST.

9.35 The suggested changes would not affect the income tax treatment of taxable income arising from accommodation-related activities.

9.36 Businesses that incur GST as part of developing an activity that involves or will involve the supply of commercial accommodation would still be able to register for GST and claim input tax deductions. However, the business would be required to deregister if, in a 12-month period, the turnover from that activity fell, or was likely to fall, below the specified threshold. Businesses required to deregister for GST under this suggestion would be required to return GST on the open-market value of any assets held at the time of deregistration.

9.37 If the supply of short-term accommodation is part of a wider taxable activity, only the short-term accommodation would be excluded from being part of a “taxable activity”. So, for example, a person who had a $9,000 turnover from renting out a holiday home and a $31,000 turnover from other business activities may have previously registered for GST in respect of both activities. Under the suggested measure the person would only need to choose whether or not to register in respect of the other business activities.

Transitional rules

9.38 We are aware that the suggested changes in this chapter could result in GST being payable on unrealised assets. Consistent with the announcement by the Minister of Revenue in October 2006, when the Inland Revenue draft interpretation statement was released, we are considering legislative options that would seek to preserve the status quo for GST-registered persons who had registered for GST and claimed GST for expenses associated with the accommodation before final decisions are made by the government.

9.39 We invite submissions on the transitional rules that should be introduced to assist GST-registered persons who may be affected by the changes suggested in this chapter.

69 IS0049 GST Exempt Supply: Supply of accommodation in a dwelling, released by Inland Revenue on 19 October 2006.

70 See section 14.

71 Ibid footnote 10, p. 36.

72 See section 2.

73 See section 10(6).

74 See section 2.

75 See section 14.

76 This would most likely involve retaining paragraph (d) of the definition but in a modified form.

77 See section 2.