The Inland Revenue focuses on sectors of the economy where tax is not being paid as it should.
According to the Inland Revenue, focusing on the income of estate agents has reduced the number of private expenses being claimed when they shouldn’t have been, including for things like clothing and toilet.
It expanded its “hidden economy” focus – a project working on transactions that are not disclosed to the taxman, including in areas such as hospitality and trades – to cover the real estate sector last year.
He worried that people would underestimate their income and overestimate their expenses, causing them to pay less tax than they should.
“Real estate is a booming field during Covid and our analysis of the sector suggests that estate agents generally claim a high level of expenses relative to their income,” spokesman Richard Owen said at the time.
Inland Revenue’s hidden economy manager Trevor Jeffries said now that more than 90% of expected returns had been filed for 2021, the department compared the results to previous tax years.
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“What the analysis tells us is that the trend we identified of increasing private spending being claimed has reversed and we are now seeing less private spending being claimed,” Jeffries said.
Inland Revenue started the campaign because a number of estate agents appeared to be claiming private expenses on their business income, or claiming expenses without business records, paying GST on net rather than gross income, and don’t not including wage subsidy payments with their annual tax return.
“IR monitored and reviewed 2021 tax returns that did not meet industry standards. Common errors include claims for gifts, clothing and personal care, meals and entertainment expenses, as well as issues like calculating home office and vehicle expenses,” Jeffries said.
“Another common error was the under-reporting of income for GST purposes, where customers incorrectly used the net amount deposited in their bank account as income for GST purposes.
“If we are concerned that someone has claimed over-expenses, they will receive a letter from us asking them to prove the claimed expenses. This ‘evidence’ may include items such as bank statements, invoices, board and any other information confirming that the expense is deductible.
“Only a small number have been referred for audit action. Prosecution is an option of last resort.”
Chris McKeen / Stuff
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Jeffries said real estate agents are aware of the campaign.
“We have received tremendous support from real estate companies and continue to work with them to support their agents. Our online and live webinars have proven to be a success and we have been encouraged by the engagement and questions arising of these sessions.
“We expect that officers will now be well aware of common errors and how to file a correct return. However, we will continue to use our data analytics to monitor 2022 returns as they are filed, and if necessary, we will take the appropriate enforcement action.
“Our approach is to first educate people and create self-help materials. We would much rather encourage customers to do the right thing from the start. We therefore recommend that people contact us before contact them.”
Deloitte tax partner Robyn Walker said it was perhaps one of the most high-profile examples of the Inland Revenue using its new data analysis powers.
“The Inland Revenue has essentially established that there are high levels of business expenses claimed by some estate agents relative to their income levels – much higher than in other sectors. Inland Revenue has proactively ‘educated’ the industry on what is an appropriate business expense to claim and the latest release indicates it has been successful,” she said.
“One of the biggest issues the self-employed face is the line between what is a business expense and what is a personal expense; Generally, expenses for clothing, toiletries, meals and other entertainment are often not deductible and there are limits on the number of home office and vehicle expenses that can be claimed.