INLAND REVENUE TAX AUDITS: WHY PROPERTY INVESTORS NEED BETTER RECORDS THAN EVER

Inland Revenue tax audits are increasing as IRD invests more heavily in compliance activity, data analysis, automated tools, and targeted reviews of property transactions. For New Zealand property investors, landlords, developers, and people caught by the bright-line rules, this means Inland Revenue now has a much stronger ability to detect undeclared income, GST errors, and incorrect tax positions.

Inland Revenue reported in April 2025 that it opened 3,600 audits between July and December 2024. That was 50% more than the same period in the previous year. IRD also said those audits found $600 million of additional tax that should have been declared. Its systems screened more than three million returns, which led to reviews of 30,000 returns, and audits, screening and voluntary disclosures added $859 million to tax revenue.

Property investors should pay close attention. In May 2025, Inland Revenue reported that it had uncovered more than $150 million in undeclared income tax and GST from the property sector. IRD said it had been taking a closer look at developers, people with rental properties, and people covered by the bright-line test. (Thinking of using AI to sort it out? Here’s why that’s a bad idea)

30-Second Read: Key Points

• Inland Revenue opened 3,600 audits between July and December 2024, which was 50% more than the same period in the previous year.
• IRD found $600 million of additional tax through those audits.
• IRD’s systems screened more than three million returns and reviewed 30,000 of them.
• Inland Revenue has uncovered more than $150 million in undeclared income tax and GST from the property sector.
• IRD is looking closely at developers, rental property owners, and people affected by the bright-line test.
• IRD found $72,937,921 in discrepancies from developers in the financial year to date, a 48% increase on the same time last year.
• IRD has also found $59,959,470 in discrepancies involving other GST property issues, a 39% increase on the same time last financial year.
• IRD says it sees non-compliance or errors early using automated tools and analytics.
• Property investors should review GST, rental income, bright-line exposure, ownership structures, and record keeping before Inland Revenue asks questions.
• If you discover a mistake, fixing it early can be much better than waiting for IRD to find it.

 

IRD’s Increased Compliance Activity Changes the Risk for Investors

Inland Revenue has moved into a more active compliance phase. Its April 2025 media release made this clear. IRD said increased tax compliance work was continuing “at pace” and noted a noticeable increase in audit activity.

That matters for property investors because property transactions leave a strong paper trail. A property purchase, sale, refinance, transfer, subdivision, commercial lease, or change of use can create tax consequences. Inland Revenue can compare information across returns, GST filings, property data, trust information, company information, and other sources.

IRD has also said it uses many business rules to automate business processes and uses machine learning algorithms across large datasets for advanced analytics, decision support, and predictive modelling. Inland Revenue states that activities undertaken as a consequence of these algorithms remain subject to human oversight and human decision-making.

This does not mean every property investor should panic. It does mean investors should stop assuming that errors will go unnoticed. The better approach is to keep accurate records, understand the tax treatment before transactions happen, and correct mistakes promptly.

Data Matching and Automated Tools Make Property Errors Easier to Find

Property investors often deal with multiple entities. One person may own a home personally, hold rentals in a trust, run a company, and have family transactions or shareholder loans sitting in the background. Inland Revenue can now use data from different sources to identify situations that need a closer look.

IRD’s April 2025 release gives an example. Inland Revenue said it had contacted 200 business owners with multiple properties, including properties held in company names, trusts, and personal names. IRD told them it knew they had multiple properties and believed they should be able to refinance to pay their tax debts. Those 200 people had $14 million of debt between them, and within a month more than $10 million had been paid or placed under arrangement.

This shows how Inland Revenue can use property information in a practical compliance context. It also shows that IRD does not only look at whether a return has been filed. It can also look at whether a taxpayer has assets, debts, entities, and financial capacity that do not align with their tax position.

For property investors, this means ownership structure matters. It also means records need to explain the commercial reason for transactions between related parties, trusts, companies, and individuals.

Rental Property Owners Are Now a Clear Focus

Inland Revenue’s May 2025 property release specifically named people with rental properties as one of the groups receiving closer attention. IRD said its increased compliance work, funded by extra money in the previous year’s Budget, included a closer look at the tax affairs of developers, people with rental properties, and people covered by the bright-line test.

Landlords should take this seriously. Rental property tax mistakes can arise in ordinary situations, not just aggressive tax planning. Common problems include missing income, claiming private expenses, treating capital improvements as repairs, incorrectly apportioning mixed-use costs, or failing to keep enough documentation.

Investors should also take care when renting to family members. If the arrangement does not reflect a normal commercial rental arrangement, expense claims may need closer review. The same applies when a property sits vacant, gets renovated, changes use, or moves between short-term and long-term rental activity.

Good rental records should include tenancy agreements, rent summaries, bank statements, invoices, loan statements, insurance details, rates notices, body corporate levies, repairs documentation, and correspondence with property managers. These documents help tell the story behind the tax return.

Developers Face Particular Scrutiny

Inland Revenue has placed strong emphasis on property developers. In its May 2025 media release, IRD said it focuses on defaulting property developers to make sure they meet their GST and income tax obligations. IRD reported that it had found $72,937,921 in discrepancies from developers in the financial year to date, a 48% increase on the same time last year.

IRD also described a specific pattern. Some developers claim significant GST refunds as they incur upfront costs, but then fail to file and pay once properties sell. IRD said that where it expects a GST payment from a property sale and does not see the sale in the return, it contacts the developer to make enquiries. If there is no response or no return filed, IRD says it will take enforcement action quickly.

This is an important warning. Property development often involves large GST amounts, bank funding, staged payments, settlement timing, related entities, and cash-flow pressure. A developer may receive GST refunds during the build phase, but the sale phase can create GST and income tax obligations that must be returned correctly.

Developers should reconcile each project carefully. They should track land costs, development costs, GST claims, sale proceeds, settlement dates, entity ownership, funding arrangements, and tax payment obligations. They should also avoid treating GST outputs as available working capital without allowing for the obligation to pay Inland Revenue.

GST on Land and Property Transactions Needs Careful Treatment

GST remains one of the biggest risk areas for property investors and developers. Inland Revenue’s property release says IRD is seeing a growing number of issues involving companies or individuals making multiple land transactions where GST needs to be correctly accounted for. IRD also said some taxpayers are changing the intended use of land or frequently transferring ownership between entities with or without GST registrations. IRD said these actions appear to be attempts to circumvent GST obligations.

Inland Revenue reported that work in this area had found $59,959,470 in discrepancies in the financial year to date, a 39% increase for the same time last financial year. IRD also said it sees non-compliance or errors early, using automated tools and analytics.

That is highly relevant to property investors. GST issues can arise when investors buy or sell commercial property, deal with land intended for development, transfer property between associated entities, subdivide land, or change the intended use of a property.

The key point is simple: do not leave GST until after settlement. GST wording in sale and purchase agreements matters. Registration status matters. Intended use matters. The identity of the buyer and seller matters. A transaction that looks straightforward commercially may carry a significant GST consequence.

If you are unsure whether GST applies, get advice before signing. Fixing GST after the fact can be expensive and stressful.

Bright-Line Obligations Remain on IRD’s Radar

Inland Revenue also highlighted bright-line compliance in its May 2025 property release. IRD said it started a campaign in March to help people understand their bright-line obligations. It said people who had sold a property recently should check the property tax decision tool and work out whether they need to pay tax.

IRD reported that it had helped more than 550 customers with bright-line issues and processed $3.68 million in voluntary disclosures. It also reported that the discrepancy found in the bright-line area was $14,152,162, a 9% increase.

Bright-line issues can catch investors who do not see themselves as developers or traders. A taxpayer may simply sell a rental property and assume the gain is not taxable. However, the bright-line rules can apply depending on acquisition date, disposal date, type of property, and available exclusions. A property sale could even tax your residence, if you get your timing and other factors wrong.

Investors should not rely on memory or assumptions. They should review purchase dates, title transfer dates, sale dates, ownership changes, main home use, inherited property issues, relationship property situations, and whether any exclusions apply. They should also document their reasoning.

If a property sale may fall within the bright-line rules, the investor should calculate the position before filing the tax return. If they discover an earlier omission, they should consider a voluntary disclosure.

Record Keeping Is Now a Risk Management Tool

In the current environment, record keeping does more than help your accountant prepare accounts. It protects you if Inland Revenue asks questions.

For a property investor, useful tax records include:

• sale and purchase agreements
• settlement statements
• loan documents
• bank statements
• invoices for repairs and improvements
• tenancy agreements
• rental summaries
• property management statements
• rates and insurance invoices
• body corporate invoices
• valuation reports
• GST calculations
• bright-line calculations
• emails about intended property use
• trust, company, or partnership documents
• records of related-party arrangements

The best records explain both the numbers and the reason for the tax treatment. For example, if you claim a repair, keep the invoice and enough detail to show why the cost was a repair rather than an improvement. If you apportion expenses, keep the calculation. If you transfer property between entities, keep the documents that explain the commercial reason for the transfer.

When Inland Revenue asks questions, a clear file can make the process smoother. A poor file often turns a simple query into a major problem.

Common Property Tax Problems Investors Should Review

Property tax issues often develop slowly. An investor may repeat the same mistake for several years before anyone notices. When Inland Revenue finds the issue, the adjustment may cover multiple returns.

Common areas to review include rental income, private use, family use, repairs and maintenance, capital improvements, interest deductibility, depreciation recovery, legal fees, travel costs, home office claims, bright-line treatment, GST registration, and land sale transactions.

Investors with trusts or companies should also review shareholder current accounts, beneficiary current accounts, advances, loans, related-party rents, and expenses paid by the wrong entity. Inland Revenue’s April 2025 release said IRD had combined its own data, information from trusts, and Companies Office data and found 800 people who may have been trying to avoid the top 39% tax rate by wrongly keeping income in companies or trusts. IRD said those people and their accountants were being followed up.

That does not mean every trust or company arrangement is wrong. Many are perfectly legitimate. However, investors should make sure their structure has proper records and that income sits in the correct place for tax purposes.

Voluntary Disclosure Can Reduce the Damage

If you find a mistake, you should not ignore it. Inland Revenue’s April 2025 release confirms that voluntary disclosures formed part of the $859 million added to tax revenue through audits, screening and voluntary disclosures.

A voluntary disclosure can help taxpayers correct errors before Inland Revenue finds them through its own processes. The outcome depends on the facts, timing, and type of error, but early action usually puts the taxpayer in a better position than silence.

For property investors, voluntary disclosure may be relevant where rental income was omitted, GST was treated incorrectly, a bright-line sale was not returned, expenses were overclaimed, or a developer failed to return income from a sale.

The first step is to understand the size and cause of the problem. Then gather the records, calculate the adjustment, and seek advice on how to approach Inland Revenue. Do not guess. A rushed correction can create new problems if the figures are wrong.

Practical Steps Property Investors Should Take Now

Property investors can reduce risk by reviewing their affairs before Inland Revenue contacts them. Start with the areas most likely to create large adjustments.

1. First, review all recent property sales. Check whether bright-line rules, development rules, land sale rules, or GST rules apply. Make sure the sale appears correctly in the relevant tax return.
2. Second, review rental income. Match rent received to bank statements and property management records. Check that each owner has returned the correct share of income.
3. Third, review expense claims. Identify repairs, improvements, private costs, family-related costs, legal costs, borrowing costs, and mixed-use costs. Make sure each claim has support.
4. Fourth, review GST. If you own commercial property, develop land, subdivide, transfer land between entities, or make repeated land transactions, seek advice on whether GST registration or GST adjustments apply.
5. Fifth, review ownership structures. If you use trusts, companies (or LTCs), or partnerships, ensure the records match the actual ownership and the tax returns.
6. Sixth, fix mistakes early. If something looks wrong, investigate it now rather than waiting for an Inland Revenue letter.

Why Professional Advice Matters More in This Environment

Tax rules for property investors can be complex. The issue is not just whether you earned rental income. Investors also need to consider ownership structure, purchase intention, sale timing, debt funding, GST, bright-line rules, associated persons, repairs versus improvements, and related-party arrangements.

As Inland Revenue improves its data capability – and use of AI – taxpayers need tax positions that can withstand review. A position should not merely look reasonable on the surface. It should match the law, match the facts, and be supported by records.

Professional advice can help identify problems before they become expensive. It can also help investors respond appropriately if Inland Revenue raises questions. In many cases, the cost of an early review is far lower than the cost of penalties, interest, professional fees, and stress after an audit begins.

Summary

Inland Revenue tax audits now sit within a much more active compliance environment. Inland Revenue has reported a 50% increase in audit openings for July to December 2024 compared with the same period in the previous year, along with $600 million of additional tax found through audits. IRD also reported that its systems screened more than three million returns and reviewed 30,000 of them.

For property investors, the message is even clearer. Inland Revenue has reported more than $150 million in undeclared income tax and GST from the property sector. It has specifically focused on developers, rental property owners, and people covered by the bright-line test. It has also identified major discrepancies involving developers, GST property issues, and bright-line matters.

The practical conclusion is simple. Property investors need accurate records, correct GST treatment, careful bright-line reviews, and clear documentation for tax positions. Inland Revenue’s automated tools and analytics make it easier for IRD to find errors early. Investors should therefore fix issues before they become costly disputes.

Need Help Reviewing Your Property Tax Position?

If you are concerned about Inland Revenue tax audits, GST on property transactions, bright-line tax, rental property records, developer obligations, or undeclared property income, Epsomtax.com can help: We work with New Zealand property investors, landlords, developers, and business owners who want practical, careful tax advice. We can review your records, identify tax risks, help correct historic errors, and assist if Inland Revenue has contacted you.

Contact us today to review your property tax position and reduce the risk of costly Inland Revenue surprises.