Over the last year we have been working on a number of IRD audits of bars, cafes, pubs and restaurants. While these are not particularly great money spinners for the IRD relative to the effort they need to put in, the auditing of this area has to be welcomed as it improves the overall compliance by taxpayers in the economy with their tax obligations. The cash economy has been alive and well in the hospitality world and as such, the watchful eye of the IRD being bought to bear on them has certainly been successful for the IRD. From my experience, all if not most of the audits that they have undertaken have resulted in fairly sizeable adjustments.
However, that is not to say that necessarily the IRD is always correct. They are certainly entitled to use industry averages to sample which taxpayers to look at, but they then cannot try to assess them based on those same industry percentages. An average is an average, at the end of the day some people will be above it and some will be below it. For taxpayers who make a lower than average GP, there are also those who make a higher than average GP. If the IRD wants to try to increase the amount that a lower than average GP hospitality business pays tax on, then they must also reduce it for those that are above the average. The New Zealand tax system does not work by taxing businesses on a standard expected margin or amount of profit dependent on the type of business they are in. The IRD simply cannot do this.
Secondly, the IRD has in my opinion often adopted bully tactics in relation to the way they have handled these audits. They haven’t quite rammed the door down and administered truth serum, but they certainly have used a large arsenal of their weaponry and in many cases simply haven’t listened to common sense. The IRD has continued to try to apply a view that all taxpayers are villains, and that anything unexplained is therefore taxable. Often there are very valid reasons for things which the IRD simply does not accept.
Interestingly however, if you back out the recent hospitality audits, and the few banking and financial institution cases that are still being settled following Alesco, the IRD has been relatively quiet in its audit activity also shown by the fact that it has been relatively down in its collection of penalties from audits.