As New Zealand businesses navigate through the current economic recession post pandemic, a concerning trend has emerged: overdue tax debt is on the rise. John Cuthbertson FCA, Chartered Accountants Australia and New Zealand (CA ANZ) Tax Leader, says, this surge in overdue tax liabilities shouldn’t come as a surprise.

Cuthbertson asserts that the aftermath of the pandemic, coupled with tough economic conditions, has placed further stress on struggling businesses, including meeting their tax obligations.

Recent statistics released by Inland Revenue (IR) provide a snapshot of the scale of the overdue debt problem. The data reveals a concerning uptick in the number of taxpayers with overdue tax liabilities, emphasising the need to tackle this issue head on. Individual income tax debt saw a leap from $1.1 billion in December 2022 to $1.4 billion in December 2023. Meanwhile, non-individual income tax debt surged from $513.6 million to $629.0 million over the same period. GST debt climbed from $1.9 billion to a staggering $2.5 billion between December 2022 and December 2023.

Furthermore, employer debt increased from $838.6 million to a substantial $1.2 billion in the same timeframe.

Cuthbertson points to several factors contributing to this troubling trend. Throughout 2022, New Zealand businesses benefited from substantial Covid support, low interest rates and robust consumer demand. However, as the economy recalibrates, these favorable conditions have waned. With interest rates near peak and consumer confidence plummeting, businesses are grappling with the additional financial strain.

For some, this strain comes when they have limited to no financial reserves left after riding out the effects of extended Covid lockdowns. The ripple effects of these shifts are now manifesting in the form of mounting tax debt. Often accounting to IR for tax withheld is one of the first things to slide when struggling to survive. Payment of employee wages and suppliers are typically prioritised to enable the business to continue in the short term at least.

In response to the increased pressure, Cuthbertson highlights the IR's strategic shift towards debt recovery. With the focus transitioning from pandemic relief to business as usual, the IR has intensified its efforts to address taxpayer compliance and enforcement, and overdue tax liabilities.

Compliance activity is also important to ensure that all businesses are paying their fair share of tax. The temptation for some not to do the right thing will grow during times of high financial stress. As a counter to this, Cuthbertson points out that IR are increasingly seeking more data and information from taxpayers and industry groups, including payment service providers. This proactive approach aims to refine and better target its review and audit processes, with an emphasis on leveraging data analytics to enhance enforcement measures.

IR has outlined a response plan to mitigate the impact of overdue debt. IR urges taxpayers - customers in their terminology - with outstanding compliance obligations to engage with them. Early engagement and entering an instalment arrangement to repay debt is likely to result in better outcomes.

According to IR, “Over the coming months we will visit businesses with significant outstanding tax debt. These customers have not engaged with us, despite more than one reminder and warning notices. We have a range of options to help customers who are struggling with debt. However, they need to talk with us so that we can understand their circumstances and work with them.

If customers do not engage with us and carry on ignoring their obligations, we may need to take stronger action. This action will include debt enforcement and or insolvency proceedings.”