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By Anand Reddy
With the shared economy growing, Kiwis renting out their assets may find themselves with increased tax obligations. PwC partner Anand Reddy suggests some things to be aware of.
In 2011, Time magazine called the ‘sharing economy’ one of the 10 ideas that could change the world. Since then, we’ve seen a growing number of people make substantial side-revenue from renting out their properties through the likes of Airbnb, sharing vehicles and boats with Uber, Zoomy, and GetMyBoat, and even renting out their empty driveways and carparks by the hour, with New Zealand’s Parkable.
Skills are also being shared in this collaborative environment. Kiwi company MyCare, for instance, is connecting people who need help – from assistance with errands to live-in support – with those who can provide it.
Two years after Time’s prediction, the global sharing economy had already recorded annual transactions of €10.2 billion (almost NZ$16 billion), statistics from the European Commission show.
Two years after that, it had almost tripled to €28.1 billion (NZ$43 billion). And that’s at a time when PwC US’s figures showed only 44 per cent of people had even heard of the sharing economy.
You’d be hard pressed today to find a person in New Zealand who hasn’t heard of Uber or Airbnb – to name just two of the biggest players in the sharing economy. In fact, some families and individuals are discovering it can be more valuable to rent out their investment property or spare room for, say, two or three nights a week than have a long-term tenant paying rent.
However, it’s important to remember that the tax laws still apply. Inland Revenue has provided some guidance for people monetising their assets in the sharing economy.
It says: “If you get money from renting out your house, a room, a caravan or a sleep-out for any time at all – it’s income.” The same goes for money made from trading skills or ride-sharing.
Investing safely means making sure you’re on the right side of the law and avoiding the penalties that come with failing to follow the rules. So, let’s look at some of the tax obligations you should be aware of and may encounter, depending on your situation.
1. You may need to register for GST
If you rent out your boat, non-residential property or many other assets, you could be obligated to register and account for Goods and Services Tax (GST). Registration is generally required where you have had turnover of $60,000 or more in the last 12 months, or expect to have turnover of $60,000 or more in the next 12 months.
If you do register for GST, you may also be able to claim GST back on a certain portion of expenses in relation to these assets. Speaking of which . . .
2. You will likely have deductibles
Paying income tax (or other taxes) on the assets you’re sharing also comes with the possibility of deducting a portion of your interest and fixed costs. Car or boat owners who use these assets for mixed business and personal use will likely be able to claim for registration and insurance, at least for the time the vehicles are used for earning income.
Similar rules apply around expenses incurred in relation to renting out residential property. Generally deductions can only be made to the extent the asset is used to earn income.
3. Be prepared for provisional tax
Anyone with ‘residual income tax’ to pay of more than $2,500 will have to pay provisional tax (broadly, residual income tax means a person’s remaining tax liability at the end of the tax year, after claiming all allowable deductions and tax credits).
Whether your residual income tax will be, or is, more than $2,500 can be difficult to predict and accurately work out. Underpay, and you may be liable to shell out interest to Inland Revenue; overpay and your money will be tied up at Inland Revenue, at very low interest.
4. Appreciate depreciation
Assets that are important to your rental income and likely to depreciate in value – furniture, carpets, and other possessions – can often be claimed against. If the property is not rented out for the whole year, owners will generally be able to claim depreciation only for the time that the asset is used to earn income.
5. Be a tidy Kiwi
Be sure to keep clear records of all income and expenses made and spent as part of your asset-monetising venture. This will make it easier for you and Inland Revenue to identify your tax obligations when you fill in your individual tax return (IR3).
Cloud-based accounting software can be a cheap and easy way for businesses to keep track of their business’s performance.
People with other tax concerns can contact Inland Revenue or their tax adviser.
When it comes to the effect tax can have on your assets and investments, it’s always better to be safe than sorry.