The $1.3b hole: the hidden cost of failing companies

Tuesday, 29 October 2024

Figures from Inland Revenue show $1.3b of tax debt is owed by liquidated companies ‒ just over 1% of New Zealand’s total tax take.

Companies gone bust owe the country $1.3 billion in unpaid tax, as the Government cracks down on debtors and liquidations continue to rise.

Inland Revenue says the debt is “cumulative” and theoretically recoverable. Separately, the department has written off more than $1.2b of debt in the past two financial years, including money owed through liquidations and bankruptcies.

The numbers illustrate the ongoing fallout from the pandemic and ensuing economic downturn.

Kare Johnstone, insolvency partner and chairperson of industry body Ritanz, says liquidations are “absolutely” on the rise in 2024.

Liquidations are now above pre-Covid levels, and this year they are tracking 40% ahead of 2023 - a delayed reaction, insolvency experts say, caused by the Government’s fiscal stimulus measures.

Insolvency practitioner Kare Johnstone said the debt figures would likely keep climbing along with liquidations.

She pointed to Inland Revenue’s latest annual report, which put total overdue tax debt at $7.9b, compared to $4.2b in 2019/20.

Over the same period, outstanding GST alone jumped from $1.5b to $2.8b.

Inland Revenue has been “more proactive” in its debt work in the last couple of years.

“It’s very rare for us when we get appointed for [a company in liquidation] not to have any outstanding tax debt,” Johnstone said.

The other element is Inland Revenue itself. During Covid, the Labour government directed the department to ease off on debt collection.

In 2020, there were just 17 company liquidations triggered by Inland Revenue and $6.4 million of debt and dividends recovered.

“The key thing with Inland Revenue was to be pragmatic,” said former Cabinet minister and Labour associate finance spokesperson Megan Woods. “What we wanted was actually viable businesses to survive.”

Those numbers have climbed steadily since. In the first nine months of this year, Inland Revenue has nearly matched the number of liquidations it triggered in all of 2023 (254 compared with 269).

In the past five years it has recovered $280m, nearly half of it since the National-led coalition Government took office.

More money for Inland Revenue tax audits was a condition of the Government’s coalition agreement.

National and New Zealand First’s coalition agreement included a commitment to more funding for Inland Revenue to “urgently expand [its audit] capacity, minimise taxation losses due to insufficient IRD oversight, and to ensure greater integrity and fairness in our tax system”.

An Inland Revenue spokesperson said liquidation proceedings were a last resort, but an increasingly common one.

“One of the drivers behind the upwards trend is certainly our focus on debt work and recovery… The more we do, the more likely we will see higher levels of bankruptcy and liquidations because some businesses are simply not viable and are unable to meet current liabilities plus deal with historical liabilities.”

Johnstone, who is also chairperson of industry body Restructuring, Turnaround and Insolvency Association of New Zealand (Ritanz), said there were many intervention options before liquidation.

“One of the things I think the IRD needs to be looking at is taking steps to take action earlier so that the debt doesn’t continue to grow to a position that it’s not repayable.”