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Bright-Line Application to Serviced Apartments


As promised in last month’s article, this month’s topic looks at the Brightline rules and its application to Serviced Apartments.

 The inclusion of Serviced Apartments to the definition of residential land for the purposes of the Brightline Test has brought with it uncertainty as to how these rules can be practically applied. It 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 Brightline 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 Brightline rules have included what is typically defined for GST purposes as a commercial dwelling, and an activity that for income tax purposes meets the criteria as a taxable activity to derive income to be a residential dwelling for Income Tax purposes under the Brightline rules.

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

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, the Inland Revenue have cited that a property used in the taxable activity of a Bed and Breakfast, would be able to utilize this exemption in relation to the Brightline rules. Given this, if a taxpayer was utilizing their property solely in the taxable activity to derive income from short-term accommodation and provide other services such as cleaning or Wi-Fi, would this property not 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 Brightline Rules, only time will tell.

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Carole PedderInvestor, Tax