Tax Debt: Getting out of the red

All taxpayers are required to pay their tax in full and on time. Unpaid tax returns can quickly spiral into significant accumulated debt to the Inland Revenue, particularly when penalties and interest start to be applied. There are however financial relief options available to taxpayers who find themselves in this uncomfortable position. The Commissioner of Inland Revenue’s standard practice for considering tax debt relief is set out in the Standard Practice Statement 18/04 Options for relief from tax debt (“the SPS”). This SPS sets out two avenues for financial relief for taxpayers; entering into an instalment arrangement or writing off amounts for serious hardship. Instalment arrangement applications are available to all taxpayers, whilst hardship applications are only available to natural persons. It must be remembered though that the decision to provide financial relief is a discretion that rests with the Commissioner and it is not available as a right.

Instalment Arrangements

An instalment arrangement can be a one-off payment or a number of payments over time (regular or irregular, equal or varied amounts). What is important is the core tax debt is paid with an agreed payment plan and in an agreed timeframe, whilst ensuring all current tax returns are filed and paid as they become due. Use of money interest will continue to be imposed over the term of the arrangement. The proposed term for an instalment arrangement should generally be as short as possible, whilst not putting the taxpayer in serious financial hardship. Generally, a term of no longer than two-to-three years is acceptable to the Inland Revenue.

Once an instalment arrangement has been successfully completed and the core tax debt paid, an application can be made to the Inland Revenue for the Commissioner to consider the remission of any penalties and interest that were imposed on the debt. Remission applications require specific information to be provided to the Inland Revenue as relief can only be granted under the specific circumstances set out in the Tax Administration Act 1994. We suggest discussing any remission application with your tax advisor to ensure you have the best chance of a successful application.

Hardship Applications

When considering a serious hardship application the Commissioner follows a two-step approach, “Is there serious hardship?” and secondly, “What relief, if any, should be granted?”. The Tax Administration Act 1994 specifically defines what serious financial hardship is, and therefore to have the best chance at a successful application we again recommend discussing any applications with your usual tax advisor.

If a financial relief application is successful, taxpayers need to bear in mind that this debt relief may trigger other tax consequences, for example, adjustments may be required to prior year tax losses or imputation credits.

If a financial relief measure is not able to be agreed upon with the Commissioner, then the options available to the Inland Revenue to collect outstanding debt include insolvency actions like the appointment of liquidators.

Although the number of insolvency appointments in 2022 is following a similar trend to 2021, the total number of appointments thus far in 2022 has been lower than that of 2021. There was an average of 386 appointments per quarter throughout 2021, but this average is slightly lower in 2022 to date at 339 appointments per quarter (albeit there is a trend towards rising appointment numbers).

Recent data shows that the three largest affected sectors by insolvency in Q2 of the calendar year 2022 continue to be construction; rental, hiring & real estate services; and accommodation & food services. These three sectors are those that were, and continue to be, significantly impacted by COVID-19. The construction industry continues to face supply chain issues, whilst the real estate services and hospitality industries are challenged by border closures and a lack of tourism.

These forces are combining to push up insolvencies of these industries above medium-term moving averages, and we observe the following:

• Construction accounted for 20% of total insolvencies over the last 18 months. This has crept up to account for 21% of total insolvencies in Q2 2022.
• Hiring & real estate services accounted for 12% of total insolvencies over the last 18 months. This has seen a sharp rise to account for 15% of total insolvencies in Q2 2022.
• Accommodation & food services accounted for 10% of total insolvencies over the last 18 months. This has also seen a sharp rise to account for 13% of total insolvencies in Q2 2022.

The number of winding up applications through the Courts significantly dropped in 2020 as a direct result of COVID-19, together with Government (including Inland Revenue) stimulus packages. In 2021, 60% of all winding up applications were made by Inland Revenue compared to 33% the previous year (2020). This was evident in the first seven months of 2021 when winding up applications made by Inland Revenue drastically increased but then reduced due to the new COVID-19 variances hitting New Zealand in the latter part of the year. This year to July 2022, Inland Revenue winding up applications make up 45% of all winding up applications, which has seen a month-by-month increase since March 2022.

July 2022 is already the highest month for Inland Revenue winding up applications and from our observations, this trend is predicted to keep rising for the rest of 2022 as Inland Revenue takes a more aggressive approach to collecting overdue tax debt.

The following graph highlights the total winding up applications from 2020 to 19 July 2022 with Inland Revenue comparisons:

• If your company has an overdue tax liability that can’t be paid in full, then it is important that you seek advice from your usual Deloitte tax advisor and open communications with Inland Revenue as soon as possible. In our experience, Inland Revenue is open to repayment proposals for overdue tax if they are contacted now rather than when the debt becomes too high.
• Any repayment proposal will usually need to accompany a cashflow schedule to show that the company can afford the repayments under any proposal submitted.
• It is essential that when on a repayment proposal, the company adheres to the agreed repayments or contacts Inland Revenue if they are about to miss a repayment.
• If you receive a statutory demand from any creditor (not just Inland Revenue), it is recommended that you seek independent professional advice as soon as possible.

We are here to support your business to reduce risk and maximise value. Navigating the pressures associated with change, whether that’s due to growth or stress, is key to the sustainable performance of a business. Our team works with boards, management teams, banks, investors, government agencies and other stakeholders to help organisations navigate complex challenges and achieve optimal outcomes.

If you would like to discuss how Turnaround & Restructuring may be able to help you, please contact one of the team.