IRD cracks down on Chinese food outlets

An Inland Revenue Department crackdown on Chinese restaurants has shocked the Chinese hospitality industry, which says it is struggling to recover from the effects of the recession.

In the run-up to Christmas at least 12 Auckland Chinese restaurants received surprise visits from IRD officers, who interviewed all staff.

The investigation approach was "unprecedented", said Auckland Chinese Food and Beverage Business Association president Tony Cho.

Restaurants that reported profits lower than the industry average were in the IRD's sights, said chartered accountant and former IRD senior investigator Wing Wong.

"It appears that restaurants with a gross profit ratio of 50 per cent or less are being targeted."

Medium-sized eateries had so far been in the gun but he expected larger restaurants would also be investigated.

"It is unclear as to whether the smaller food outlets such as takeaways would be similarly targeted as the IRD has limited resources."

The IRD's activities have unnerved the Asian business community.

"This is a significant departure from the usual IRD approach of first notifying the taxpayer to be investigated that they have been selected for a tax investigation," he said.

In at least one of the surprise visits, IRD staff were reportedly also accompanied by immigration officials and police officers.

It is understood the taxman's key areas of concern are cash wages paid to restaurant staff, particularly part-timers, and staff meals.

A Chinese restaurant industry insider said that paying wages under the table was a common practice. The restaurants benefited by not paying PAYE and GST but it was also done because some staff were receiving Work and Income benefits.

A few owners told the Herald on Sunday they would be happy to pay PAYE on all wages but some workers demanded cash and they would struggle to recruit the necessary staff otherwise. However, they also said if they met all their tax obligations their businesses would not be viable.

Owners were bewildered when IRD questioned staff about whether they ate while at work, Wong said. They had believed there were no tax implications in providing staff meals.

The tax department probably intended to treat the provision of meals as an entertainment expense, he said.

Auckland has about 200 Chinese restaurants. Cho said the trade was harder than when he started his takeaway business in the 1970s. Then there was little competition from international fast-food chains such as McDonald's and KFC.

Although the local Chinese population was now bigger, there were also many more Chinese restaurants and owners struggled to put up prices.

A restaurant was a relatively easy business to start up and that was why many new Chinese immigrants went into the industry.

They appealed to their customers with lower prices and free soup and fruit because the market was so competitive.

"The price of Chinese food, in some instances, is almost similar to the prices charged some 20 years ago even though the cost of running a restaurant has increased considerably."

Cho said the IRD investigation might be a "disaster" for some restaurants but the "industry needs to review its operations and the manner in which the businesses are conducted".