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Inland Revenue

Tax Policy

Chapter 6 - "Dwelling" and "commercial dwelling" definitions

Rest homes and retirement villages

6.1 The definitions of “dwelling” and “commercial dwelling” were amended with effect from 1 April 2011. The purpose of these changes was to provide clarity in the boundary between these definitions. This was achieved by narrowing the definition of “dwelling” and updating the types of accommodation that should be treated as “commercial dwellings”.[9]

6.2 It has always been the intention of the GST system that exempting a “dwelling” provides substitutability between renting and owning a house.[10] Narrowing the “dwelling” definition was therefore consistent with this policy objective.

6.3 Part of the amendment to the definition was importing the idea of “quiet enjoyment” from section 38 the Residential Tenancies Act 1986 (RTA). This concept was considered to encapsulate the distinction between a property that a tenant would genuinely consider to be their “home” and one where their occupancy was more temporary.

6.4 However, a question has arisen that “quiet enjoyment” may not always be able to be demonstrated in relation to the provision of accommodation of retirement villages and residential rest homes.

6.5 The definition of “commercial dwelling” excludes (in paragraph (b)(ii)) “a dwelling situated in a retirement village or rest home…”. It has therefore historically been contemplated that it was possible for a retirement village or rest home to be comprised of both “dwellings” (for occupants that were essentially independent) and “commercial dwellings” (for occupants that require active care).

6.6 It is arguable that, in some cases, “independent living” rest home accommodation fails to satisfy the “quiet enjoyment” test. This is where rest home operators impose contractual obligations on tenants that allow the operator or its agents to enter the property with no (or very limited) notice to, for example, carry out maintenance checks. These contractual rights can be interpreted as being in contradiction to section 38 of the RTA, in particular when that section is read in conjunction with the “landlord’s right of entry rules” in section 48 of that Act.

6.7 It is therefore arguable that rest homes that have these contractual terms would only operate “commercial dwellings”. Although this would entitle the operators of these homes to input deductions, it would also mean they would be required to charge output tax on the rental payments by their tenants. This would be an unintended policy outcome from the 2011 changes to the definitions.

Suggested solution

6.8 We consider the “dwelling” definition should be clarified to include retirement village and rest home accommodation that could broadly be described as a principal place of residence where the occupant is living independently.

Suggested application date

6.9 We suggest an application date of 1 April 2011 with a “savings” provision for taxpayers who may have filed their tax returns on the basis that independent living arrangements are not “dwellings” as defined.

Requirement to be registered

6.10 When the definitions of “dwelling” and “commercial dwelling” were amended, it was recognised that these changes would mean that some premises that were “dwellings” would become “commercial dwellings”. To cater for this, a person that is, as a result of the change, making taxable supplies (of a commercial dwelling) is allowed an input tax deduction in relation to the relevant premises.[11] This compensates the person for the fact that their supplies going forward would attract output tax.

6.11 To avoid people claiming large deductions while only making minimal supplies, section 21HB provides that the input tax is only available if the person is “registered under section 51(1)…” (section 51(1) being the compulsory registration provision). The intended effect of this rule is that a person may only claim the input tax if their supplies in relation to the commercial dwelling were over the $60,000 registration threshold.

6.12 However, a concern has been raised over whether the expanded definition of “commercial dwelling” might adversely affect sole traders otherwise operating below the registration threshold. For example, a registered architect who is “registered under section 51(1)” in respect of her architectural business also owns a holiday home that she occasionally rents out. Because of the changed definitions, the architect is required to bring the holiday home into her broader taxable activity – claiming an input deduction on the purchase price and returning output tax on subsequent rental arrangements.

6.13 It may be the case, however, that the architect would prefer not to be forced to incorporate the holiday home into her taxable activity for GST purposes.

Suggested solution

6.14 We do consider that an amendment to section 21HB is justified so that a sole trader who owns a rented property is not automatically registered for GST in relation to that property.

6.15 Section 21HB should be amended so that a person has the option of including the commercial dwelling as part of a broader taxable activity if their supplies of the commercial dwelling are under $60,000. This option should only be available if the person:

  • is affected by the changes to the “dwelling” and “commercial dwelling” definition; and
  • is required to be registered for reasons other than the supply of a commercial dwelling.

Suggested application date

6.16 The suggested amendment can only operate in favour of the taxpayer and addresses an unexpected outcome. Therefore, we suggest an application date of 1 April 2011.


9 See commentary to the Taxation (GST and Remedial Matters) Bill 2010, page 10.

10 White Paper (Proposals for the Administration of the Goods and Services Tax) Advisory Panel on Goods and Services Tax, March 1985 [B. 27].

11 Section 21HB of the Goods and Services Tax Act 1985.