Almost half the hate crimes reported to the police are being wrongly downgraded from a criminal offence, to either "incidents" in which no crime was committed, or to lower level crimes.
Police have published their annual data quality report, which highlights the problems with how the offences are being dealt with.
Hate crimes include racially motivated abuse, violence, threats or intimidation, and the latest figures from police show the majority of staff do not know how to code them.
According to the report published this week, 43 per cent of hate crime complaints have been downgraded from what should be classed as a criminal offence.
Often they are called an incident, and not a crime, while a small number are also reduced to a lesser offence.
About 15 per cent of complaints are upgraded to a higher level than they should be.
Just four out of 10 complaints are being dealt with properly.
Anjum Rahman, from the Islamic Women's Council, said the figures were alarming.
"What this shows is that there is a lot of training needed, particularly of frontline staff, in some areas," Rahman said.
"There appear to be some areas, such as the 105 team, who are well trained and able to assess a lot better than other types of staff who would be getting the complaints first hand."
A police spokesperson said further training is coming.
Police only recently started recognising hate crimes - the move coming after the Christchurch terror attack in March last year.
"There'd been requests for quite a number of years for police to do this," Rahman said.
"It was of course disappointing that they waited until after a tragedy to put that effort and resourcing in, but absolutely they are moving in the right direction and we are very happy that they are doing so."
Police are now starting to log hate crimes in both the National Intelligence Application, or NIA database, which covers nearly half the population, and in the police's dispatch system database.
But the report said almost half of hate crime reports were not being put into the national intelligence database, which keeps a permanent record, and more than half were not being linked across different databases.
In a statement, police admitted they have a long way to go in their work on hate crime.
"Police has been consistently improving how hate or prejudice is captured as a contributing factor to crime or incidents in our recording systems," the statement reads.
"However, as identified by the Annual Report on Police Data Quality, we have work to do to ensure the data reflects an accurate picture of hate crime-related offences.
"Police continue to focus on tracking and checking flagged hate crime/hate incidents in our systems, to ensure they are accurately recorded and that we're able to provide a response that victims and communities expect.
"Subsequent checks since the completion of the Annual Report indicate that accuracy rates have been improving."
The numbers for improved reporting were not immediately available from police.
Police are also working with other agencies and community groups, to improve their reporting systems and processes.