RESOURCES: Your bach as a business

Once you start renting out your bach, it becomes a business. Diana Clement clarifies some tax interpretations to help you avoid being audited by the tax man!

By Diana Clement

Letting your bach is a great way to make money and save tax. But beware, unless you treat letting your bach as a business, you could miss out on lucrative tax deductions.

The Inland Revenue Department (IRD) has clarified how it taxes holiday homes. This is good news for bach owners who want to keep on the right side of the tax man.

The sting in the tail will hit bach owners who let to family and then make the same deductions as those letting their properties on the open market. The taxman says where baches are let to friends or family who pay koha instead of market rent this payment will generally not be classed as “rental income”.

If the bach is only available to family and friends at peppercorn rental and not advertised to the public, the tax deductibility will be severely reduced. Bach owners who, in the past, classed renting to friends and family as making the property available for rent, will be hit severely in the pocket by this decision.

The good news for Bookabach members is that the website can provide a great record for you to submit information to the IRD with the number of days actively marketed; number of days rented and number of days used by “owners/family/friends”.

We’ve put together a “Need to know” question-and-answer guide below regarding the proposed law changes and how this could affect you as a bach owner.

Do I need to report rental earnings to the IRD?

When you rent out your bach in effect you’re letting your property as any property investor would. Rents must be declared to the IRD – even if your only customers are friends and family.

For most bach owners that’s good news because on the flip-side of the coin, your mortgage, rates and other expenses are usually greater than the rent you receive and can be claimed against other taxes.

The main difference between a bach and other rental property is that there is a private-use component with a bach – and the expenses can only be claimed according to the number of days the property is available for rent. Be aware that you need to prove it was available.

What expenses can I deduct?

The IRD… confirms the approach taken by many bach owners of deducting expenses according to the number of weeks the property is available for rent.

The IRD’s “clarification” confirms the approach taken by many bach owners of deducting expenses according to the number of weeks the property is available for rent.

You can deduct all of the expenses related with running your bach. See the box on the left hand side of this page for a list of deductible expenses. You can also depreciate certain capital expenditure, such as re-roofing, re-piling andmajor building works. These items can’t be claimed directly against income; only depreciated.

If you have major renovation work planned you may want to do it in a year when your bach is only available for rent and you are not staying in it personally – so that you can claim the maximum depreciation.

Bach owners, like ordinary property investors can also deduct depreciation annually on both the building and chattels, but be aware that should you sell the property, the IRD may well claw this money back.

What can’t I deduct?

You can’t deduct the proportion of the expenses related to the time your family spends at the bach or for any periods when it is not available for rent, such as during annual maintenance.

You should also be conservative when claiming items such as sporting equipment and/or household items that are destined for your own home. The same should be said of paint and hardware.

Also, it’s not a good idea to push the boundaries on the entertainment front. If you are investigated by the IRD and found to be claiming fraudulently, you could be fined heavily and have to pay back the tax refunds you’ve received.

What about letting to friends and family?  (Koha vs. Rent)

The IRD gives the example where a holiday home is let to friends at a nominal amount of $20 per night to cover power, water and wear and tear, adding up to a total of $420. In that case the owner could only claim expenses up to the maximum of $420, whereas mortgage interest alone on a bach can add up to tens of thousands of dollars a year. Open market lets, require the holiday house to be let “at arms’ length” and market rent be charged.

You must declare all income, including koha, from letting to friends and family. However you are taxed differently on this income – and it’s not all good news.

The IRD says where a holiday house is used by friends or family who are not charged market rent, this payment will generally not be classed as “rental income”.

Do I have to register for GST?

If you are simply letting a family bach you can’t register for GST because your property is viewed as a residential rental property and is exempt from GST.

Since December 2009 the Inland Revenue Department has classified home-stays, farm-stays and serviced apartments as commercial dwellings, which can be registered for GST. Having said that, the distinction between a residential dwelling and a commercial dwelling is a fine one and you may want to check with your accountant before making a decision about GST.

One trap to beware of is buying property that is zero rated for GST. Usually this involves serviced holiday apartments on short-term leases to hotel chains. If you want to remove the property from the lease and change its use, you will need to repay 12.5% GST to the IRD. The only way out without paying this money is to sell the apartment as a going concern.

Is it okay for the family trust to own the property?

It is very common in New Zealand for baches to be owned by family trusts in order to protect the asset from creditors or acquisitive partners – preserving it for future generations. The disadvantage from a tax deduction point of view is that you can’t then claim the losses against your personal tax. The losses can be rolled forward in the family trust. But if that trust doesn’t make money in the future, you’ve got nothing to claim the losses against.

The alternative is to own the bach in your own name directly or in a loss attributing qualifying company (LAQC) allowing any losses to be deducted on your personal tax return against your regular income.

What documentation do I need to keep? What would the IRD ask for?

You will need to keep good paper and financial records of your bach rental business if you want to claim losses. That includes a log book outlining when the bach was available on the open market, rented to friends and family, and rented to strangers (although this is easy using an online system such as Bookabach), a system of recording mortgage payments, rates bills, maintenance, cleaning and other receipts.

It can be useful to use cashbook or accounting software to keep all your figures in one handy digital file.

It’s a good idea to set up a system, rather than putting all of your receipts into a box. At the simplest level that could involve using an A-Z expander wallet and filing receipts and other documentation as you get it.

More info

www.ird.govt.nz - What the IRD says in full.

This article is provided as an opinion piece only. Bookabach does not provide legal or accounting advice. We suggest you see an accounting or legal professional and get advice that’s specific to your needs and circumstances.