Heading into tax season, property investors would be well-advised to take Inland Revenue (IRD) seriously, rather than under-estimating it. That’s because after a period of business transformation which included investigative staff being moved from auditing to other areas the organisation is returning to normal. As it does, it is ramping up its investigative activity again and, inevitably, that includes the work of its Property Compliance Programme, according to tax expert Terry Baucher, from Baucher Consulting. “A recent report states there’s a return of $9.58 for every dollar invested in property compliance work. So it’s worth it, there’s value for money in it.”

But, in practical terms, what does this mean for investors? Well, one thing to note is that the bright-line test has served to clarify what the limits for intent are in terms of buying and selling property. In the past, intent was often open to interpretation. That has changed. Baucher says they are now seeing the IRD going through returns and applying the guidelines provided by the bright-line test to property transactions when intent might be an issue.

“It’s not just recent transactions they are looking at either. We’ve come across examples where the transactions predate the arrival of the bright-line test and are beyond the time bar limit which is usually four years on from the filing on the return.”

It is possible for the IRD to do this because if you do not include a source of income in your tax return, which you should have included, then the time bar rules don’t apply, he says. “And they are starting to look back at returns and do that. The intent test has always been there but the problem was the IRD had to prove someone meant to sell.

“It’s much easier to make the case that intent was there now. So what the IRD is doing is clawing back what has happened: they are saying that if the bright-line test had existed we would have looked at this transaction differently.” Another development worth noting is that IRD is cracking down on property owners who make money from the short-term rental accommodation market. And it’s not just larger scale short-term rental hosts who could feel the pinch. While those renting out several properties full-time via platforms like Airbnb could run into trouble on the GST front if they don’t understand the rules, anyone offering up short-term rentals who doesn’t declare the income could end up owing the IRD.

Baucher says the IRD will be trying to get hold of client ledgers from shortterm rental platforms and is also still finetuning its data robots. But it will be rigorously monitoring and checking all the relevant digital platforms and social media channels in relation to properties it assesses. This all means there’s a few things investors need to make sure of when dealing with the IRD. First and foremost, careful record keeping is essential. That means ensuring you have the documentation around all your transactions. It’s worth assuming that anything relevant in writing will be seen by the IRD, Baucher says.

“The IRD gets copies of sale and purchase agreements and copies of approvals for finance. So if an investor is careless in their language about what they are borrowing the money for the IRD will find it. “In a similar vein, correspondence with real estate agents can be disclosed. So whatever you say to the real estate agent as to what the property is being purchased and sold for can be disclosed.”

Be aware of the rules around the bright-line test, he adds. “Finally, proceed on the assumption that your digital profile will be found by the IRD and that any transaction on property will also be available to them. Remember - usually when they start asking questions they already know the answers.”