A Wellington brothel owner has been sentenced to 11 months home detention on two representative charges of tax evasion.
Zhi Rong Zhou pleaded guilty to the charges in August 2022 and was sentenced in the Wellington District Court on May 12.
The 40-year-old arrived in New Zealand in 2000 and became involved in a number of businesses including the brothel, Pillow Talk. He also owned four properties worth nearly $4 million.
Investigations began into his tax affairs in 2020 and included searches of two of his properties and an analysis of txt messages from his mobile dating back to 2015. It found two of the properties were rented out, but no rental income was declared for tax purposes.
He ran Pillow Talk, hired workers, advertised their services, managed bookings, and took a third of worker’s earnings. Up until 2019, Pillow Talk used only cash as there were no EFTPOS or credit card facilities at the brothel.
Zhou knowingly failed to account for all of the business activity he was involved in to evade the assessment and payment of income tax and GST of $663.513.83 - made up of $183,682.04 in income tax, $452,834.01 in GST, and $26,997.78 in Working for Families Tax Credits.
There was dispute about how much the average daily gross earnings of the business were, but the courts accepted Inland Revenue’s method. IR assumed all the cash deposited into Zhou’s New Zealand bank accounts represented one-third of the cash payments made by Pillow Talk clients.
IR also used other sources such as text messages, sex worker rosters and hand-written records of customers to work out what the average daily gross earnings of the business were.
Justice Touhy was satisfied that Zhou was liable to return GST on the basis that his Pillow Talk business was the supplier of sexual services for which the recipients - its clients - paid for.
For most of the time under investigation Zhou was receiving an income tested benefit and receiving Working for Families Tax Credits.
Zhou had already repaid $300,000 but was ordered to pay a further $150,000 in reparations and ordered to do community work.
Inland Revenue says while most people are honest and pay tax on all their income, those who intentionally avoid paying tax or claim money they are not entitled to, are robbing honest people of services they might have had.
That is why we help people do the right thing and act when people deliberately try to avoid paying tax.
There are several ways everyone can help make sure everyone pays their fair share. https://www.classic.ird.govt.nz/tax-crime/stop-tax-crime/