The New Zealand Inland Revenue Department (IRD) is set to conduct inspections at hundreds of businesses suspected of falling short on their tax obligations. This initiative follows approximately 7,000 anonymous tip-offs received this year, reflecting rising public frustration with businesses that do not comply with tax laws.

Nail salons and hairdressers are among businesses under scrutiny due to suspicions of undeclared cash income. Andrew Stott, the IRD’s marketing and communications group manager, noted, “We’ve been making unannounced visits to these establishments. They generally respond positively, often providing information about competitors they suspect of misconduct, which aids our investigations.”

A spokesperson for Rodney Wayne welcomed this news, stating it’s a positive development for all the legitimate salons and spas that pay their taxes and ACC.

With a budget allocation of $116 million this fiscal year to enhance compliance and enforcement, the IRD has doubled its workforce in response. 

According to the IRD, many of the reported issues stem from employers who accept cash payments for personal gain without adequately recording sales or who compensate employees in cash. The IRD said the risks are higher where businesses deal directly with consumers and their goods and services are at a low average price point.

Tax evasion, defined as the deliberate avoidance of paying the correct amount of tax, can occur when businesses fail to report earned income or inflate their deductible expenses. 

One typical scenario involves a salon that uses Bank A for both its business and personal banking. While all EFTPOS sales are consistently deposited into the business account, cash deposits are either nonexistent or infrequent. Meanwhile, the personal bank account shows an increasing amount of cash deposits. This pattern could suggest an attempt to conceal cash sales to avoid paying taxes. Another example is a business withdrawing cash to pay staff and not paying tax (PAYE) on the wages.

Common Red Flags

• No payments are made to Inland Revenue as part of their ordinary course of business
• Activities outside the norms of an industry or the habits of the customer
• No cash sales when some would be expected or cash sales when they would not be expected
• Use of a personal bank account for business transactions
• Cash sales out of proportion with business/industry
• Transactions involving known low or no-tax jurisdictions
• Use of shell companies or other opaque entities
• Complex, unusual patterns of transactions or uncharacteristic transactions
• Back-to-back transactions (including loans) and multiple transfers through conduit entities or trusts
• A lack of supporting documentation or a lack of willingness to provide supporting documentation
• Income or means that appear insufficient for the apparent lifestyle such as large asset purchases (real estate and high value boats/motor vehicles/art/jewellery) and frequent overseas travel
• The only source of funds in the bank account is from Inland Revenue
• Purchases of property or mortgages paid off quickly outside of their regular financial profile
• Financial statements are noticeably different from those of similar businesses, have not been prepared professionally, or there are two sets of financial statements.

In New Zealand, the typical tax year runs from April 1 to March 31, with income tax returns due by July 7 following the end of each tax year. Provisional tax allows self-employed individuals or businesses to stagger their tax payments throughout the year, generally resulting in one to six payments annually.

Consider seeking advice from a tax professional to ensure compliance and avoid potential penalties or legal repercussions. To check you have met all your tax obligations this year, refer to the 2024-2025 tax due date calendar.

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