The Inland Revenue Department is continuing to write off hundreds of millions of dollars in tax every year. Photo / Getty Images
The Inland Revenue Department is continuing to write off hundreds of millions of dollars in tax every year. Photo / Getty Images
The Inland Revenue Department is continuing to write off hundreds of millions of dollars in tax every year, with one expert saying the system is "based on trust" and many Kiwis just let their debt spiral "out of control".
Financial specialists also warned the consequences of Covid-19 would not befelt until the Government subsidies ended - and business owners were already "struggling", which was taking an emotional toll.
Figures released under the Official Information Act show nationally it wrote off $533 million in the 2018/19 tax year, including $203m due to liquidations.
In the 2019/20 tax year, which has not finished yet, it wrote off $311m including $104m due to liquidations.
The data also showed over the same timeframes the largest debts written off for a single customer were $49m and $5m consecutively - the department declined to name the companies as the information was confidential.
Meanwhile, in the Bay of Plenty seven companies in Tauranga were taken to the High Court and placed into liquidation from July 2019 to March 31 this year and owed a combined debt of $2.8m. In Rotorua, six companies were taken to court and collectively owed $986,197.
The New Zealand Taxpayers' Union said the fact so much tax had "been written off so early shows how many New Zealanders and businesses are struggling".
Director Jordan Williams said tax should only be written off once "it's very clear it can't be collected".
"It's a reminder that the Government needs to value every dollar and ensure that taxpayers' money is spent well and not wasted."
IRD customer segment lead Richard Philp said tax debt was written off for a number of reasons including, but not limited to, liquidation and the cost of collecting the debt.
"The commissioner must find an appropriate balance ... to collect the highest net revenue, with the need to promote voluntary compliance with regard to the resources available."
Tax Link director Allan Wells said one of the problems with the country's tax system was "it is, based on trust, that we will all do the right thing and pay".
"Then IRD have to make sure that's what's happening and then often human nature comes into play. They might have a small debt which builds up out of their control and then they get in out of their depth.
"You can't get blood out a stone," he said, adding that it was important not to let it reach that point and to seek help.
Wells said being under financial pressure could also take a huge toll.
"Of course, it has a big emotional strain. But it's just getting them to do something about it."
Tauranga-based insolvency specialist Tom Rodewald said a company would be put into liquidation or receivership because it could not pay its bills and there was "no other way forward".
The managing director of Rodewald Consulting Limited said 99 per cent of receiverships were actioned by a secured creditor and it was not uncommon for businesses to negotiate.
But he said negotiations depended on the makeup of the business or whether it had a future or not.
"The common thing at the moment is negotiating with landlords. There is a whole range of circumstances."
Rodewald said he had as many as 10 inquiries from distressed business owners during the "peak" week in May.
"I am used to dealing with one a week ... There was probably a rush once lockdown was removed."
Rodewald said his business quietened in June and July but he expected things to pick up again in September once the wage subsidies ended.
He advised business owners at risk of losing their business to see a professional "before it is too late".
"People need to be realistic about their position. If you're going to start a business you need to be sure you do it right."
Tauranga Chamber of Commerce chief executive Matt Cowley. Photo / File
Tauranga Chamber of Commerce chief executive Matt Cowley said the global impacts of Covid-19 were yet to be fully realised in New Zealand.
"The wage subsidy helped many people retain employment during and post-lockdown, which has helped consumer spending to rebound to near-normal levels.
"However, there are many uncertainties around New Zealand's long-term economic recovery plan."
Cowley said there would be businesses that have had to close due to Covid-19.
"This could be due to a stroke of bad luck, bad timing, or they are unable to adapt to the new marketplace quickly enough."
He said it was important start-up businesses sought advice, including regarding the company structure, ownership structure, and tax.
"The advice may seem unimportant when you first start but it can be very important later on or during tougher economic periods."
Rotorua Chamber of Commerce chief executive Bryce Heard said tax advice was one of the important pieces of advice required for anyone starting out in business.
"People paid on wages or salaries, largely have their tax paid for them by their employer and a business can run into cash flow issues if tax is not provided for, including provisional tax on next year's forecast profits and regular GST payments on monthly trading."
Heard said not understanding tax was a common problem for new business owners and he advised people not to fall behind with tax payments "as it can have a big effect on your cash flow and the penalties can be draconian".
BDO Tauranga Limited director Paul Manning said a lot of clients were recovering well from Covid-19.
"Some are struggling though and are receiving ongoing support from BDO."
Manning said a lot of business owners may struggle to generate sufficient cash to pay staff once the wage subsidy extension expired.
"The key for business owners' survival is to seek professional advice as early as possible from a business turnaround specialist."
Liquidation, receivership, insolvencies
Year ended June 30 2020: Liquidation: Tauranga: 46 Rotorua: 12 Other: 20 Bay of Plenty total: 78
Receivership: Tauranga: 2 Rotorua: 5 Other: 1 Bay of Plenty total: 8
Total insolvencies: Tauranga: 48 Rotorua: 17 Other: 21 Bay of Plenty total: 86
March 25 to July 8 2020: Liquidation: Tauranga: 9 Rotorua: 6 Other: 3 Bay of Plenty total: 18
Receivership: Tauranga: 0 Rotorua: 0 Other: 0 Bay of Plenty total: 0
Total insolvencies: Tauranga: 9 Rotorua: 6 Other: 3 Total insolvencies: 18
