Tax debt is the most common single cause of business failure escalation in New Zealand, not because the original amount is unmanageable but because of what happens when it is ignored.
How it escalates
Unpaid tax attracts use-of-money interest from the due date, and late payment penalties applied at intervals. Together they compound a manageable liability into a serious one over a surprisingly short period.
The other escalation is behavioural. A business that misses one GST payment and does not address it frequently misses the next, because the cash was never recovered.
Engage early — it genuinely changes the outcome
Inland Revenue has discretion around instalment arrangements and around remitting penalties in certain circumstances. That discretion is exercised far more favourably toward taxpayers who make contact before a due date or shortly after than toward those who respond to enforcement action.
Practical position: if you know you cannot pay, contact them before the date rather than after. An arrangement agreed in advance avoids some penalties that would otherwise apply.
Instalment arrangements
An instalment arrangement allows payment over time. What Inland Revenue generally wants to see:
- All returns filed, even where the tax cannot be paid. Filing and paying are separate obligations, and non-filing removes goodwill entirely.
- A realistic proposal based on actual cashflow, not an optimistic one you will breach.
- Current obligations kept up to date alongside the arrears. An arrangement on old debt while new debt accumulates will not hold.
- Evidence of the financial position where the amount is significant.
Interest generally continues to accrue during an arrangement, though penalty exposure can be reduced. Breaching an arrangement is worse than not having one, so propose something you can actually meet.
Financial relief and hardship
Where paying would cause serious hardship, relief provisions may allow debt to be written off in part. The threshold is genuine, and the process requires disclosure of your financial position.
For companies, relief considerations differ from those for individuals, and continuing to trade while insolvent raises separate director duty issues.
The tax types that create the most exposure
PAYE and KiwiSaver deductions are held on behalf of employees. Failing to pay these is treated more seriously than other tax debt, and in defined circumstances there can be personal liability for company officers.
GST is money collected from customers on the Crown’s behalf. Businesses that treat it as working capital are funding operations with money that was never theirs, and the shortfall grows each period.
The single habit that prevents most tax debt: move GST and PAYE into a separate account as they are earned.
Directors’ duties intersect here
Where a company cannot meet its tax obligations, directors should consider whether continuing to trade creates a substantial risk of serious loss to creditors, and whether obligations are being incurred that cannot reasonably be expected to be performed.
Accumulating tax debt while continuing to take orders and incur liabilities is exactly the fact pattern that supports reckless trading claims. Take advice at that point rather than later.
What Inland Revenue can do
Enforcement options include deduction notices requiring third parties — banks, customers, employers — to pay money owed to you directly to Inland Revenue, statutory demands, and liquidation applications.
A deduction notice served on your customers is commercially damaging beyond the money, because it signals financial distress to the people you depend on.
Practical sequence if you are behind
- File everything, immediately, even if you cannot pay.
- Work out what you can actually pay, using a thirteen-week cashflow forecast rather than a guess.
- Contact Inland Revenue and propose an arrangement.
- Fix the cause. Tax debt is a symptom — underpricing, poor collection, excess drawings or an unprofitable business. An arrangement without addressing the cause simply defers the problem.
- Separate tax money from operating cash going forward.
- Get advice if the amount is material or if solvency is in question.
Where to look
Inland Revenue publishes guidance on instalment arrangements, financial relief and penalties free at ird.govt.nz, including online application for arrangements.
Accountants deal with this regularly and can negotiate on your behalf. The conversation is easier for them than for you, and they know what proposals get accepted.
General information only, not tax or legal advice. Take advice early if solvency is in question.
