The rapid rise and impact on consumer behaviour by digital disruptors, like Airbnb, has been widely felt by consumers and traditional businesses alike. Tax authorities are also not immune to this disruption and must adapt to the new ways in which revenue can now be generated.
We see this impact daily with the likes of Airbnb, which has been a significant disruptor for how a property can be rented. A key component of Airbnb’s success is its “ease of use” and versatility, allowing users to rent their property on their own terms and in a manner that suits them.
As a result, users can rent their property in more unusual ways than what has traditionally occurred, and it introduced a new group of taxpayers to tax obligations they are simply not used to.
The combination of these factors poses new challenges to the Inland Revenue Department (IRD) to ensure that those renting their property on Airbnb are compliant with their tax obligations.
On a global basis, the IRD has started to address some of the complexity in the tax system with their Tax Simplification and Digital Transformation Projects. However, these changes won’t necessarily assist with the compliance issues arising from Airbnb rentals.
This lack of tax compliance is in part due to the complexity of some of the rules, but is also driven from a fear of the unknown with tax rules or perhaps not wanting to know. This is not only an issue for the users themselves, but many advisers also do not fully understand the rules. Therefore, the IRD needs to be more active in addressing these issues.
Typically, the first option they have is to be more active with enforcement. This is fairly uncomplicated and shouldn’t be that difficult to undertake given the data available on Airbnb rentals is hardly inconspicuous. Even local councils have undertaken successful compliance operations using Airbnb data. This would also reward those taxpayers who have complied.
However, they should also consider whether the tax rules are fit for purpose, given this new breed of taxpayer. Essentially, could they adopt this “ease of use” approach to taxation?
With this in mind, what could this look like in the Airbnb context?
From my perspective, I would suggest the greatest gains could be made in relation to the GST rules.
As noted above, for many Airbnb operators they have a limited understanding of their GST obligations, so when this is outlined and they are alerted to the fact that their Airbnb activity could also drag their house into the GST net, the old ostrich is tempted to stick its head in the sand.
Given this, should the GST regime be altered to specifically assist with this lack of compliance? This would be controversial given a feature of the New Zealand’s GST regime is that it doesn’t exclude that many forms of activity, but perhaps more subtle changes could be effective?
For instance, one of the primary issues has been whether a person who is renting their property on Airbnb should be registered for GST. The test for this is relatively simple. If a person has total supplies (gross rent) of $60,000 or more in a 12-month period, they are required to register for GST. Most can understand and manage this, however, there are situations with Airbnb rentals where this is less certain.
One such situation arises from the associated person rules, which can inadvertently cause the owner of an Airbnb property to breach this registration threshold. This is due to a requirement that deems the use by an associate (such as a beneficiary of a trust or a partner in a partnership) to be at the same market rate offered to third parties.
For example, if over a 12-month period, a holiday home owned by a trust is let out for 40 nights on Airbnb for $40,000 and is used for 25 nights by beneficiaries, then the trust will be required to be GST registered.
The other issue caused by this deemed market rent treatment, is that affected taxpayers must now apply different rules between income tax and GST, which adds to their compliance burden.
A potential solution would be to completely align the GST rules with the Mixed Use Asset (MUA) rules of income tax (i.e. remove the deemed market rent by associated persons in the MUA scenario), then the tax rules could be simplified and some of that fear aspect with complying might be removed.
Alternatively, what if Airbnb instead withheld tax on each rental at a flat rate and paid this to the IRD direct? This could be a final tax (unless the user chooses to file), which promotes 100% compliance without involving the user, and the government gets instant revenue from the activity. There would be many issues to walk-through with such a concept, but given the platforms that are being used, this shouldn’t be outside the realms of what is possible.
One thing is for certain, digital disruptors will continue to gain traction and unless the tax legislation is modified to keep up with these changes, there will always be uncertainty/non-compliance by taxpayers who use digital disruptors.
Associate Partner – Tax Advisory