By Chris Cunniffe, Specialist Adviser, TMNZ*

New Zealand’s tax debt problem has reached a scale that can no longer be ignored. At more than $9 billion and continuing to grow, the debt is concentrated in the micro and small business sector, with PAYE and GST making up more than half of the total outstanding balance.

For many businesses, these taxes have effectively become a source of short-term cashflow support. But once arrears begin to build, interest and penalties can quickly turn a temporary problem into a long-term financial burden.

After years of a ‘softly softly’ approach, Inland Revenue is now shifting into a far more active phase of debt recovery. With new funding, expanded enforcement activity, and targeted initiatives such as tax pooling for historic income tax debt, the message is becoming increasingly clear: businesses and advisers who engage early will have far more control over the outcome than those who wait until recovery action begins.

Understanding the tax debt position

The debt is predominantly owed by micro and small businesses. Over 50% of the debt relates to PAYE and GST, which indicates that these taxpayers have been using these taxes as working capital to keep their businesses running. But once they fall behind, mounting interest and penalties which now make up over a third of total debt, make it harder to get back on track.

_{Source: IR report Managing overdue tax debt October to December 2025}

IR's current response

Inland Revenue has been resourced to tackle the debt with a three-step approach:

1. Prevention. IR is using advertising and publications to highlight the consequences of not paying on time. Revenue Alert RA 26/01 reminded us that criminal sanctions apply to those who fail to pay PAYE deductions to IR.
2. Quick response to new debt. IR has activated a new tool that suggests the next best step to resolve debt. With hundreds of thousands of clients in arrears, automation of early-stage debt is crucial. Pre-approved instalment arrangements, phone calls and visits, and bank deductions are all options IR will use.
3. Focused action on older debt. There are more than 2,000 cases of older debt worth more than $600m. The worst cases will be prosecuted or referred to credit agencies. Where clients cannot enter a realistic instalment arrangement, IR may move to liquidation – they have initiated nearly 1,000 liquidations in the last six months.

Chartered accountants’ action

Accountants often don't see the full picture of their clients' positions with IR. They may be engaged for income tax returns, but not other taxes. Even with broader visibility, MyIR doesn't efficiently communicate where real cases of debt exist.

Early intervention is crucial, especially for clients who won't engage with IR or their adviser when arrears arise. We need to encourage action before the problem feels insurmountable.

Ideas for the future

The non-payment of PAYE is a material part of the tax debt problem. To quote the CA ANZ tax team at the recent roadshow: "PAYE is not your cashflow."

Perhaps it's time to remove the temptation for PAYE to be used as working capital. All employers can now access automated payroll systems, so the justification for holding onto PAYE for up to a month is limited. PAYE could simply be remitted at the same time as staff are paid.

This idea was floated about ten years ago when IR's START system came online and streamlined PAYE reporting. The Government didn't act on it and simultaneously removed the small subsidy for employers using a PAYE intermediary. Faced with mounting PAYE debt in the small business sector, it's time to re-evaluate both decisions.

New initiative – Tax pooling for debt

IR has introduced a promising new initiative. A pilot program to use tax pooling to settle income tax debt started on 30 March 2026. Taxpayers with 2023 or 2024 income tax debt can apply to pay through a tax pool, registering by 30 September 2026 and settling by 30 September 2027.

IR has set strict eligibility criteria, targeting otherwise compliant taxpayers who are up to date with filings and other tax payments.  IR also has discretion to allow those with existing arrangements to clear GST and PAYE debt to participate.

Tax pooling eliminates late payment penalties and materially reduces the interest cost of settling. IR pauses debt recovery action, so the taxpayer works with the tax pool – not IR – to manage the debt.

Act now to control the outcome

IR's hands-off approach contributed to the current position. The pendulum has swung: IR is now resourced and highly focused on tax debt. Expect quicker action on new debt and targeted action on older debt. Clients who don’t act now may find it's too late to choose their own path forward.

Advisers who have clients with debt, should help them engage with IRD early. Where clients have income tax debt, the new IR pilot programme represents a real opportunity to work with TMNZ to control the outcome and resolve income tax debt at significantly reduced cost.

_{(*) Chris Cunniffe is a Specialist Advisor with TMNZ – CA ANZ’s exclusive tax pooling partner – and has been a member of the CA ANZ Tax Advisory Group for more than 20 years.  Chris and the CA ANZ tax team have been working with Inland Revenue to ensure there is a connected approach to managing tax debt.}