Our tax debt: How did this happen?

Inland Revenue is being urged to investigate how billions of dollars in tax debt has accumulated, according to an economist. As of March, over half-a-million individuals owed the IRD money, with a total tax debt of $9.4 billion, of which 62 percent ($5.9 billion) was deemed collectable. Micro and small-to-medium businesses accounted for 65 percent of outstanding tax debt, with GST and employer deductions such as PAYE making up 57 percent of the overall debt.

Tax debt growth has slowed to 1.6 percent per year by March, down from 27.1 percent in the previous year. Shamubeel Eaqub, chief economist at Simplicity, noted that many insolvency requests are now initiated by the IRD, but this doesn't guarantee the debt will be paid. He questioned why businesses can trade while insolvent and whether it's too easy to start a business in New Zealand.

The Chartered Accountants Australia New Zealand lead, John Cuthbertson, attributed the debt increase to the government's more lenient approach to taxpayers during the Covid years and the allocation of extra revenue for tax compliance and collection in recent budgets.

The solution, according to Cuthbertson, could involve preventing businesses from accessing funds they should be paying in PAYE and GST, as those businesses were essentially competing unfairly against those who complied with tax obligations. Eaqub emphasized that businesses' tax obligations never go away, even when they face financial troubles.

If a business falls into arrears, the IRD may have a better chance of collecting the debt if they act promptly, as the business might still be operating and have assets. However, older debts are more likely to result in the business closing and selling its assets to other creditors before the IRD.