Inland Revenue has extended its crackdown on cash payments to the hospitality industry, and is gearing up to host a string of unannounced visits to businesses.
As part of renewed efforts to dissolve New Zealand's "hidden economy", estimated to be worth close to $1 billion, the tax department is targeting cafes, restaurants, bars and takeaway operators, bakeries and liquor stores who under-report cash sales and pay staff under the table.
In recent years, IRD has focused its efforts largely on the trades and construction sectors, where cash-in-hand jobs are more common.
Although the IRD will not put a figure on the hidden economy, it estimates approximately $256m worth of income was not reported in 2018 and 2019. About $108.8m in 2019, and $148m in the 2018 year.
The tax department has already carried out a series of unannounced visits to hospitality businesses in the Queenstown and Central Otago region in a bid to curb illicit trade.
IRD said the Central Otago region was a high-risk region of the country where cash sales were not being reported and staff received wages in cash payments.
Using court-issued search warrants, the tax department raided three hospitality businesses in Queenstown and made unannounced visits to six others. It seized wage records, computers and other business records, along with information on employer-provided accommodation, rental properties, working for Families Tax credits and payroll matters.
It found that businesses were paying staff in cash without PAYE being deducted, and documents revealed some were making cash deposits into private bank accounts without being returned for GST or income tax.
As a result, two businesses said they would make voluntary disclosures.
Taxman left $800m short on under-reporting from self-employed
The operation was conducted by 20 Inland Revenue compliance and forensics staff.
Richard Philp, Inland Revenue customer segment leader for micro, said unannounced visits would continue in other parts of the country as it continues to catch operators failing to comply with tax law.
There were 90 prosecutions cases before the courts due to tax evasion, Philp said.
Earlier this year the tax department successfully prosecuted five siblings running 20 Thai House restaurants throughout Auckland. One person was sent to prison for two years and eight months and three were sentenced to home detention.
They were also ordered to pay a total of more than $2.2m in reparations.
Philp said Inland Revenue research had found that the proportion of people who participated in cash jobs in hospitality and construction sectors had marginally declined in recent years, with many saying they were now less likely to be involved in such jobs.
"Cash jobs undercut legitimate operators so our goal is not to prosecute everyone but to have enough examples and representation around our enforcement work that helps guide people to do the right thing," Philp told the Herald.
The IRD first began focusing a crackdown on cash payments in the hospitality industry about three years ago. Unannounced visits to businesses are a new strategy the tax department is undertaking to clawback money owed.
"We can evaluate businesses based on what we perceive their proper level of income should be. We look at like-type businesses in similar locations and that helps us determine those that appear to be under-reporting versus those that are closer to the mark," he said.
Auckland has been a focus for the tax department for the past couple of years, though it is now moving to heavily vet the regions. "Construction industry and the hospitality industry are two industries that typically represent a higher level of cash transactions, and particularly with the hospitality industry, there are small amounts one-by-one but collectively they can build up to be substantial amounts of cash suppresses and not declared annual GST returns."
For every $1 spent on efforts to crack down on the hidden economy, IRD received about $6 in return revenue, Philp said.
Undeclared cash payments was an ongoing issue as more operators opened up shop, he said.
A Victoria University and IRD study released in April estimated that New Zealand is missing out on about $800m in its annual tax take due to the country's self-employed under-reporting their income by about 20 per cent.
Chartered Accountants Australia and New Zealand believes this is likely to be in excess of $1b each year.