IRD rolls sleeves as tax debts escalate

Inland Revenue accused of being too slow to refocus on collection after working to cushion economy from Covid, writes Matt Nippert

Not paying PAYE is a last, but dangerous, resort to keep a business alive. We can only hope things don’t get worse.

Andrew Bayly (left),

National Party revenue spokesman

Economic turbulence from the Covid pandemic has seen the number of people falling behind on their taxes soar, sparking criticism from the Opposition and tax advisers that Inland Revenue has been too slow to refocus its efforts on debt collection.

Inland Revenue Department (IRD) answers to questions from MP and National Party revenue spokesman Andrew Bayly show the number of people granted remissions or writeoffs for tax debts soared more than four-fold in the year to June 2021, increasing from 26,048 to 112,980.

While that figure stabilised to a degree this year, it remains 43 per cent higher than in 2020.

And the number of individuals with instalment arrangements — payment plans to manage overdue tax debt — also nearly doubled over the same two-year period from 17,460 to 33,478.

The figures show nearly 400,000 people are now carrying tax debts — equivalent to nearly 10 per cent of the working-age population.

Bayly said he understood and supported early moves during the pandemic to cushion the economy, but now — two years on — the taxman needed to focus more on returning to normal to prevent these problems accumulating further.

“I think everyone understood why the IRD decided not to pursue people during the depths of the crisis, that was an appropriate response. But it is concerning now we haven’t seen a real decrease in these rates since,” Bayly said.

He said there were risks to the integrity of the tax system with unpaid debts spreading and growing.

“We’re now getting back to the status quo and the big issue is whether people look at this and say ‘well, I’m paying my taxes now but others aren’t’ and it might well undermine voluntary compliance,” he said.

Questions sent to IRD this week seeking details of the dollar values of debt these increases represented, and historic data showing how the pandemic was disrupting long-term trends, were unanswered.

In a written statement, IRD stressed that its role during the pandemic had seen it lean into assistance ahead of compliance.

“The Government’s support initiatives have been the primary focus for IRD. A number of these support payments were to assist businesses when they were experiencing significant drops in revenue,” the statement said.

“It would have been illogical and counter-productive for IRD to be troubling such businesses for outstanding payments at that time, rather than supporting them into an appropriate payment arrangement for core debts.”

IRD said it had recently adjusted its approach to “engage businesses that have outstanding tax debts and who have not taken any steps to set up a payment arrangement”.

This included taking “all appropriate action to address all future debt through the legal processes available to us,” the statement said.

Instalment arrangements to manage overdue taxes, most struck during the 2021 year as societies and economies braced for the thenunknown economic effects of the pandemic, were being paid on time in 90.7 per cent of cases, IRD said.

Mike Shaw, director of advisory firm OliverShaw, said the past two years had been extreme and the initial spike in tax debts, and the IRD response, was understandable.

“Clearly we’ve gone through a onein-a-hundred-year event because of Covid, and you’ve got to bear in mind that the easiest person not to pay is the IRD.” He said he was aware focus at IRD had recently been firmly on delivering Covid-related assistance, and this meant the department’s traditional role as enforcer had suffered.

“IRD certainly took their foot off the throttle — you can sort of understand that — but enforcement clearly

now should be a top focus to make sure it doesn’t get out of hand,” Shaw said.

Geof Nightingale from PwC said core tax debt had risen from $15.4 billion to $19.1b between 2020 and 2022, but government accounts had been cushioned by better-thanexpected tax revenue.

“On the one hand, the steep rise in relief arrangements is concerning, but on the other hand it’s not surprising,” he said.

“Inland Revenue resources that would ordinarily be applied to tax compliance and debt collection were redirected to provide taxpayers and businesses support.”

This approach needed to change, Nightingale said, and there was evidence of movement at Inland Revenue.

“At this stage of the pandemic, Inland Revenue now does need to refocus its resources on tax compliance and debt management in order to protect the integrity of the tax system and we can see that starting to happen.”

Bayly said the reappearance of inflation, and with a vengeance, came at a poor time for business owners struggling with tax and other debts. This year it was revealed that unpaid PAYE and KiwiSaver contributions had doubled in the past five years, and Bayly feared the worst.

“Unfortunately, many business owners have already exhausted their debt sources and tapped out other sources of funding such as family members. Not paying PAYE is a last, but dangerous, resort to keep a business alive. We can only hope things don’t get worse,” he said.