Susan
Edmunds Money Correspondent
Inland Revenue needs
to be asking questions about how billions
of dollars in tax debt has been allowed to accumulate,
one economist says.
As of March this year, more than
half-a-million people had debt to Inland Revenue. Overall
tax debt sat at $9.4 billion, of which Inland Revenue said
62 percent, or $5.9b, was collectable.
Total tax debt
was less than $6b in 2023.
Micro and small-to-medium
businesses were responsible for 65 percent of outstanding
tax debt, and GST and employer deductions such as PAYE were
57 percent of overall debt.
The rate of tax debt
increase has slowed to 1.6 percent a year by March this
year, down from 27.1 percent a year in the year to March
2024.
Simplicity chief economist Shamubeel Eaqub said
it was noticeable that many insolvency
requests were now initiated by Inland Revenue. But he
said it did not necessarily mean the tax owing would be
paid.
“When businesses are wound up it doesn’t
necessarily mean the whole liability will be paid off. I
think what they’re experiencing is that they’re not getting
full coverage of the debts owed to IRD.”
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He said
questions should be asked about how the debt had gone to
this level. “How is it that businesses are essentially
allowed to trade while insolvent? Is it too easy to start
businesses in New Zealand? And what are the obligations of
starting a business?
“Paying your taxes is not some
kind of optional expenses it’s actually a necessity,
first-ranking kind of obligation.”
Chartered
Accountants Australia New Zealand lead John Cuthbertson said
debt had ballooned in the past four years, mostly as a
result of Covid.
“You can track it back to the
government and the various government departments, including
Inland Revenue, taking a more softly, softly approach on
taxpayers.
“The government has clearly put a line in
the sand in the sense that in the last two to three Budgets
they’ve allocated additional revenue to Inland Revenue for
compliance activity but also for debt
collection.
“There’s an expectation of a return on
investment in some cases as high as 12 to one… there’s a
definite desire to drive that debt down.”
He said his
organisation had suggested that a solution could be to stop
offering businesses the temptation of spending money that
should be paid in PAYE and GST by not letting them have
access to those funds.
“When you look at the tax debt,
it’s quite scary, it’s predominantly owed by micro and SME
businesses and it’s predominantly in the area of PAYE…
what that tells us is over a period of time, those
businesses effectively were not viable and were using those
forms of tax as cash flow. They were in essence competing on
an unfair basis against other businesses who were doing the
right thing.”
Eaqub said while Inland Revenue had
taken a softer approach during the Covid years, businesses’
obligations never went away and they had access to
government support.
“If your business is in trouble
you can reach out to people voluntarily. I feel like
businesses wait and kind of hide and hope things will get
better but it doesn’t, right? Surely that should be the
first kind of signal of risk, I can’t pay my PAYE and GST,
which is not my money, I’m stealing, maybe I shouldn’t do
this.”
Insolvency practitioner Keaton Pronk said
whether Inland Revenue could recover tax debt from a
liquidated business would often depend on the age of the
debt.
“If they act promptly when a business falls into
arrears there is a better chance of collection as the
business may still be trading and have its assets. If it is
an older debt there is a much higher chance the business
will have closed up shop and disposed of all its assets and
paid other creditors in preference to the IRD.
“In my
experience a lot of the businesses that end up in
liquidation do not pay a distribution to creditors,
particularly if it is a creditor-initiated liquidation
through the High Court.”
Inland Revenue said it could
only write off tax debt if a liquidation was finalised and
it was confirmed there were no further funds available, or
in a bankruptcy in the same conditions, where taxpayers were
in hardship or where taxpayers had died.
“The Tax
Administration Act states the Commissioner has an obligation
to collect the highest net revenue for the Government but
does give the Commissioner discretion to write off tax debt
that is uneconomic to pursue.”
Inland Revenue said
while debt growth had slowed the total amount owing was
likely to increase over this year as more fell
due.
“Forecasts indicate that the ratio of tax debt to
revenue will continue to rise in the near term. This is
broadly consistent with trends observed across OECD
countries, where prolonged economic pressures have
contributed to higher levels of tax debt.”
It said
sometimes debt was non-collectable while it was tied up in
disputes, insolvency processes or legal action. It could
become collectable again in
future.
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