Tax crackdown coming for Airbnb owners as Inland Revenue uses smart technology

Tax crackdown coming for Airbnb owners as Inland Revenue uses smart technology

Inland Revenue says it is asking countries with tax treaties to share details about Kiwi hosts renting out their homes on Airbnb. by Ben Leahy

This article first appeared on the Herald.

Take care if you’re one of the thousands of Kiwis using Airbnb or other online websites to rent out a home; you could be in the crosshairs of Inland Revenue.

The Government agency has set its smart, new data robots loose on the sector in the hunt for tax cheats.

It’s also lobbying hard to get its hands on Airbnb’s company records.

It means you could be in line for a nasty letter or a fine should you have failed to report your rental income.

“Some of the records of activities, such as Airbnb, are held offshore. However we’re working to obtain this data via data-sharing agreements we have with many overseas tax authorities,” an IR spokeswoman told the Herald on Sunday.

Mike Rudd, tax director for accountancy firm Baker Tilly Staples Rodway, said the IRD publicly clarified the tax rules around short-term rentals in May, meaning there was no longer any excuse not to declare your income.

He expected a crackdown to begin in earnest at the end of the tax year.

“They will be matching up data automatically and spitting out a lot of nasty letters,” he predicted.

It’s a blitz triggered by the big money at stake.

Tax expert Terry Baucher from Baucher Consulting said people underestimate Inland Revenue at their peril

A Victoria University and IR study estimated in April that undeclared income from the so-called hidden economy was resulting in New Zealand missing out on about $800 million in annual tax.  Chartered Accountants Australia and New Zealand put the figure in excess of $1 billion per year.

Builders, plumbers, and hotel and restaurant owners accepting cash payments and not declaring their income were among those initially in the department’s sights.

But bitcoin users, Uber drivers and Airbnb and other short-term rental hosts were now on notice as well.

Short-term rentals owners could get themselves into trouble by failing to declare the income they make from guests.

Those owning two or three short-term rentals on Airbnb or other platforms also ran the risk of racking up big tax debts under the goods and services tax if they didn’t fully understand the rules.

This was due to short-term rentals tending to bring in higher gross returns than normal rentals and so being more likely to earn above the $60,000 threshold at which GST must be paid.

Rudd said he had seen a number of people shocked to discover they were meant to have paid GST on their rental income as well as on the sale of homes used as Airbnb rentals.

Terry Baucher, founder of tax advisers Baucher Consulting, warned those who hadn’t declared their income that they were better off coming forward voluntarily.

If IR found undeclared tax, it would usually search back through five years of income at a minimum.   If there had been deliberate tax avoidance, it could do an audit through a person’s entire tax history and may even prosecute for tax evasion.

Baucher said IR was also armed to the teeth with new data-matching capabilities having recently spent $1.9 billion – mostly on computer technology – in a major upgrade.

And the upgrade appeared to be bearing fruit already. IR’s latest annual report said that every $1 dollar spent hunting undeclared tax was now returning $5.65 to the tax coffers.

Tax data was also whizzing between New Zealand and other countries at an unprecedented rate.  According to its annual report, IR received information about 700,000 financial accounts held overseas by New Zealand residents in the year to June 2019.

Baucher said he had one client use an overseas credit card to hire a campervan in New Zealand.  IR saw the transaction and contacted the man, wanting to know where the cash had come from.

Baucher described IR’s ability to detect that transaction as like finding a needle in the haystack and yet it had been done using the old computer system, not the new one.

“People underestimate Inland Revenue at their peril,” he said.

The IR spokeswoman said the tax department’s first step in securing unpaid tax was to use education to encourage Kiwis to voluntarily declare their income.

This included holding regular free seminars around the country.

However, she acknowledged there was a “temptation” for users of “sharing companies” to under-report their income.

“If that happens and people choose not to report their rental income, Inland Revenue will audit them where we need to,” she said.

Airbnb head of public policy for Australia and New Zealand, Derek Nolan, said the platform partnered with the Government to ensure it could do its job, as well as with rental owners to help them meet their tax obligations.

“We support a light-touch, mandatory data-sharing framework that not only takes data privacy laws into account, but makes it easier and cheaper for New Zealanders to pay their taxes across all sharing economy platforms,” he said.

What about the bed tax?

Inland Revenue might be calling on tax robots and international treaties to ensure Kiwi Airbnb users pay up, but Auckland Council has no such tricks up its sleeve.

Council brought in a new targeted rate, also known as a bed tax, last August for homeowners renting out their whole property or guest-house on websites like Airbnb or Bookabach.

Yet about two-thirds of eligible Airbnb hosts in Auckland have so far avoided paying the bed tax.

Council said the targeted rate would capture about 3800 of the approximately 8000 Airbnb properties in Auckland. But in the latest figures, just 1219 Auckland properties advertised on online platforms had been charged the tax.

The main obstacle has been finding the properties. Airbnb and other websites refused to share information about hosts on privacy grounds, and council officials have been forced to scour the sites manually.

Council also can’t call on its big-brother, Inland Revenue, to help.

“We currently have no plans to request the online provider information from IRD,” a council spokeswoman said.

So far short-term rental owners using Airbnb and other platforms had paid $461,765 through the bed tax.

What are the tax rules?

  • When a person’s rental properties earn less than $60,000 they do not have to pay GST tax. Instead they must declare their earnings as part of their income and pay income tax.
  • When the properties make more than $60,000 they have to register for GST and then pay GST (15 per cent) on the rent and on any future sale of the home. A tax adviser can help short-term rental owners in this situation claim deductions against the GST and against their income tax.
  • Failure to accurately report income can result in tax penalties or, in the most serious instances, prosecution for tax evasion.