In a recent email to New Zealand tax agents, Inland Revenue signaled its intent to rein in the practice of excessive expense claiming in the real estate industry. According to the letter, the need for the increased scrutiny was created by a ‘…high level of expenses relative to income’ in that sector.
So what does this mean for real estate agents?
In the upcoming months, the IRD will proactively reach out to people they think are claiming personal expenses as work expenses and ask them to prove the legitimacy of those expenses.
“If we are concerned that someone has overclaimed expenses, they will receive a letter from us requesting they prove the expenses claimed,” said Richard Owen, spokesperson for the IRD. “Things like bank statements, invoices, a logbook and any other information to confirm the expense is deductible.”
Those who can’t prove that their expenses are legitimate could face big penalties - or even prison time.
If you’re concerned about the increased scrutiny, here are some proactive steps you can take to ensure you don’t get stung:
1. Ensure your expenses are above board. Some common mistakes that catch people out are:
- Mileage - if you claim over 25% of your mileage as a business expense, then you must keep a logbook to record all times when your vehicle was used for work purposes.
- Client Meals - whenever you take a client out to lunch, only 50% of the meal can be claimed as an expense. You must also maintain records of what clients you took to lunch, the reasons for, and their business relation to you.
- Home Office and Mortgage Expenses-If you work from home, you can only claim as an expense the area you use solely for work. For example, if you work at the dining room table, you can’t claim the whole dining room as your office.
2. Keep your receipts! You must hold onto all GST receipts for at least 7 years in case you get audited by the IRD and get asked to provide proof of your purchase
3. Separate your personal expenses from your business expenses. Things like personal meals, clothing, grooming, and non-work related memberships are personal expenses and should not be claimed as work expenses. Examples of legitimate work expenses include things like your REA license and industry training.
All of this might seem a bit overwhelming and confusing, even for experienced real estate agents. If you find expense management stressful, it could be worth considering Hnry.
Our team of expert accountants automatically review all expenses, giving you peace of mind that you’re claiming the right deductions. All expense claims are instantly applied to your tax rate, so you don’t have to wait until the end of the financial year to get tax relief!
The best part of being a Hnry customer is never having to think about tax again. Hnry automatically pays and files taxes for real estate agents, giving them peace of mind that they’re always up-to-date on their obligations.
To learn more about Hnry and how it works, visit hnry.co.nz.