Don’t under estimate the IRD

Property investors beware: Inland Revenue has the investigative powers to track down and nab deliberate or inadvertent tax evaders – and they will use them forcefully.

Thursday, June 25th 2015, 12:00AM

by Miriam Bell

Auckland’s former Heart of the City boss Alex Swney was yesterday sentenced to five years, seven months in jail – after being caught out for over a decade of financial offending.

Once one of the SuperCity’s high-profile representatives, Swney failed to pay over $1.8 million in tax to Inland Revenue (IRD).

And it was the IRD, along with the Serious Fraud Office (SFO), that uncovered Swney’s offending and pursued him for it.

Swney’s conviction might seem to have little relevance to the area of property investment.

But the post-verdict words of Inland Revenue Group Tax Counsel Graham Tubb were a public warning to all those trying to evade their tax obligations.

He said New Zealanders can be confident that people like Swney, who try to cheat their system and not pay their fair share of tax, will be caught by IRD’s investigators.

“The IRD has effective systems and tools for detecting tax evasion, and will continue to develop its capabilities to identify and combat those who try to cheat the tax system.”

When it comes to the property sector, Tube’s warning is given extra relevance by the new tax measures the government announced in the Budget.*

Notably, the Budget also allotted the IRD an extra $74 million for their enforcement of tax obligations – and this included $29 million for property tax compliance.

Tax law relating to property is being tightened up, as are the IRD’s powers to enforce it, according to tax expert Terry Baucher.

Speaking at the recent National Advisers Conference, Baucher said residential property has been undertaxed due to an ad hoc approach to taxing capital gains.

“There is uncertainty around the rule that tax is payable on property acquired with the purpose or intent of resale – especially as the taxpayer’s purpose is subjective.

“There are lots of booby traps in this rule. We have lost simplicity and people don’t understand it.”

This has led to a situation whereby some people exploit the inherent loopholes to avoid paying the property tax they owe, while others don’t pay the tax because they don’t realise they have to.

In response, the IRD’s Property Compliance Programme (PCP) was established in 2007.

The PCP, which has 60 investigators and is based in eight sites around the country, is an increasingly important part of the IRD’s audit programme, Baucher said.

For example, it raised over $50 million in additional tax in the year to 30 June 2014. About $23 million of that came from taxing speculators or trading.

Given the total value of residential property sales is in the billions, this seems a little light and the PCP has clearly needed more resources, Baucher continued.

The extra Budget funds allotted to the IRD for property compliance mean the PCP’s resources will now be beefed up.

Baucher said property buyers need to be aware of this – and of how far IRD investigators can, and will, go to to find the information they need to establish intent of purchase.

“It is vital to thoroughly document the purpose of a property acquisition before the purchase.

“Document every part of the transaction, what you are doing, why you are doing it and even what you have said to real estate agents, lawyers, and lenders.”

This is because, once an IRD investigation is underway, the onus is on the taxpayer to prove the intention behind a transaction – which means the odds are stacked in the IRD’s favour.

Baucher recommended that property buyers should always be cautious and put together documentation on any transaction as though it is going to be examined by IRD investigators.

However, he added that New Zealand’s ad hoc, incremental approach to the taxation of capital gains from property will continue until someone finally instituted a universal capital gains tax.

* It is worth noting that this week the government’s new tax measures moved one legislative step closer to reality - as you can read here.

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