Paying tax debts to the Inland Revenue Department (IRD) on time is a critical obligation for businesses in New Zealand. Neglecting this responsibility can lead to severe repercussions, including statutory demands, winding-up notices, and even liquidation. The New Zealand Herald reported that IRD ramped up compliance efforts in January 2025, following last year’s Budget boost. This trend is continuing. Companies failing to pay taxes are facing swift action, including liquidation applications. The IRD appears to have "started the war drums early."
We discuss the importance of timely IRD debt payments, the benefits of proactive communication, and practical steps businesses can take to manage tax obligations while navigating financial challenges.
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Why Timely Payment Matters
IRD tax debt is a legal obligation. Failing to pay it can:
• Accumulate Penalties and Interest: Outstanding tax debts incur penalties and compounding interest, significantly increasing the total debt over time.
• Damage Business Reputation: Non-payment can harm relationships with suppliers, creditors, and stakeholders.
• Trigger Legal Action: Persistent non-payment may lead to statutory demands, court action, or liquidation proceedings.
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Proactive Communication with IRD
When facing financial constraints, the worst thing a business can do is ignore the problem. Instead, proactive communication with IRD is key:
• Engage Early: Contact IRD as soon as you anticipate difficulties in meeting payment deadlines.
• Explain Your Situation: Transparency about your financial position helps IRD assess your case fairly.
Contact McDonald Vague if you need help with reaching a settlement or negotiating an instalment plan.
By engaging early, businesses demonstrate good faith and increase their chances of receiving leniency.
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Preparing for Instalment Plans
An effective instalment plan requires careful preparation:
1. Prepare Cashflow Forecasts: Assess your income and expenses to determine what you can realistically pay without jeopardizing operations. You must be able to show you can honour any arrears and keep current debt up to date. Your business needs to show it is viable.
2. Prioritize Essential Expenses: Ensure critical costs like wages, rent, and key supplier payments are covered while allocating funds for tax obligations.
3. Monitor and Adjust: Regularly review cashflow forecasts and adjust your instalment plan if necessary, keeping IRD informed of any changes.
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What to Do (and Not to Do)
Do:
• Engage Early: Delay only compounds the issue.
• Keep Records: Document all communications with IRD and maintain accurate financial records.
• Seek Professional Advice: Accountants and licensed insolvency experts can provide tailored guidance and advocacy.
Don’t:
• Ignore Notices: Failing to respond to IRD communication escalates matters rapidly and reduces the options if you overrun deadlines
• Overpromise: Committing to payments you cannot sustain undermines credibility.
• Delay Filing Returns: Even if you cannot pay, file your tax returns on time to avoid additional penalties.
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Consequences of Inaction
Failing to address tax debt can lead to:
1. Statutory Demand: IRD may issue a statutory demand, requiring payment within 15 working days. Ignoring this can result in a court application for liquidation.
2. Winding-Up Notice: If the statutory demand is not satisfied, IRD can proceed with liquidation, effectively ceasing the company’s operations and appointing a liquidator to sell assets/business to recover debts.
3. Personal Liability: Directors may face personal liability if found to have traded recklessly while insolvent. Non payment of GST and PAYE (trust moneys) will create significant personal risk for the directors.
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Lessons from IRD’s Recent Actions
IRD is committed to enforcing compliance. Businesses must heed this warning: IRD is actively monitoring and pursuing non-compliant entities. The recent uptick in liquidation applications serves as a stark reminder of the risks of neglecting tax obligations.
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Conclusion
Managing IRD debt requires vigilance, transparency, and proactive planning. By engaging with IRD early, setting up realistic instalment plans, and maintaining robust cashflow management, businesses can navigate financial challenges effectively. Conversely, inaction risks severe consequences, including liquidation and personal liability for directors. Seeking professional advice can provide valuable insights and support, ensuring businesses remain compliant while safeguarding their operations.
The war drums of IRD’s compliance efforts have sounded. The time to act is now. Contact us for a confidential discussion.