When the IRD comes knocking

The IRD has recently discovered just how lucrative it can be to audit property investors. After concentrating on investigating the tax affairs of investors and developers in the South Island's building boom areas (primarily Queenstown, Wanaka, and Te Anau) to great success, it has recently started to crackdown on investors in Auckland. In the 18 months to the end of 2004, the IRD gathered an extra $106.6 million in tax from investigations into property transactions, including $52.9 million in Auckland alone.

An IRD audit can be an extremely stressful and disruptive process. However, the more in shape your tax affairs are, the less painful the process should be.

The first factor in minimising the impact of an IRD investigation is to ensure in advance that you have accounted for tax appropriately in relation to your property transactions. Make sure that you are aware of your tax obligations. The tax rules relating to property transactions are complicated, and you should talk to a tax adviser when contemplating a property venture.

It is a very good idea to get a tax adviser involved when you receive notification that the IRD is planning to conduct an investigation.

It is important to co-operate with the IRD. This will allow the audit to proceed faster, and a co-operative attitude is often taken into account by the IRD if it considers imposing penalties. One issue that should be considered is whether there are any issues that you should disclose in advance of investigators discovering the issue themselves. Being proactive and making a voluntary disclosure can get you a reduction in shortfall penalties. The IRD has extensive information-gathering powers. It can request information from any person, not just the person under investigation. For example, an investigator looking into whether land transactions are taxable may request information from your bank. Evidence of notes taken by bank lending staff, or information relating to the type of finance you have obtained, may, for example, be used by the IRD as evidence that you have a tax liability on the basis that you had an intention, at the time you acquired a property, to on-sell it.

There are, thankfully, some limits to the IRD's powers. It cannot, for example, enter a private dwelling without either your consent or a court warrant. It can only seek information that is "necessary or relevant'' to collecting tax. It cannot seize documents that are legally "privileged'' without your consent (certain confidential communications with your lawyer, relating to obtaining or giving legal advice, will be "privileged''). The best approach is to be prepared. Making sure your affairs are in order in advance of the IRD's knock on your door will pay dividends in the long run.

Catherine Codd is a senior solicitor in the Auckland office of Buddle Findlay.