By Lisa Marriott*
It feels like there is a high-profile liquidation every other week. Media coverage has included stories on the collapse of tiny home companies, construction firms and homeware retailers, among many others. In just the past week, a failed pool company was under the spotlight.
When businesses enter liquidation they usually leave a trail of destruction – unpaid suppliers and employees as well as customers who do not receive what they have paid for.
There are things we can do as individuals to minimise the risk associated with choosing a business to work with. For instance, you can obtain a business credit report which offers a snapshot of a company’s creditworthiness. But this comes with an added cost of at least NZ$49.
But my research shows Inland Revenue is doing less to share information about failing businesses than other comparable government agencies overseas. This needs to change to give New Zealanders greater transparency about businesses on the brink.
Early warning signs to watch for
Inland Revenue initiates more than 60% of liquidations in most years in Aotearoa. But this move often comes after a long period of non-payment.
Early recognition of uncollected tax debt can signal to potential customers or business partners that a company has problems.
The taxes that are likely to point to larger business issues are non-payment of goods and services tax (GST) and employment related withholding taxes, such as KiwiSaver contributions and pay-as-you-earn (PAYE).
These taxes are withheld on behalf of the state. There are relatively short periods between when these funds are collected and when they should be paid to Inland Revenue. Therefore, non-payment provides an early signal of trouble.
Over half of the Inland Revenue tax debt as of 2021 was made up of GST and employment related taxes, totalling $2.4 billion. And it is well established that the longer debts are unpaid the less likely they are to be collected.
My research – soon to be published in the Australian Tax Review – suggests that the non-payment of certain taxes can function as an early warning sign and minimise the knock-on impact on customers and other businesses when a company is no longer viable.
Unhappy customers, unpaid subcontractors and an insolvency officer are all in pursuit of Stephen Bingham. https://t.co/OeQAHIuFqS
— Stuff (@NZStuff) July 23, 2023
What Inland Revenue can learn from overseas
Other countries approach failing businesses more proactively than we do in New Zealand. Here are three ways New Zealand can improve how it deals with companies heavily in debt.
1. Publish details of tax defaulters
Many European countries do this. For example, the Irish Tax and Customs publishes a quarterly list of tax defaulters. This includes their name, address, occupation, unpaid tax, interest, penalties and the type of tax.
There are some criteria for publication, such as that debts must exceed €50,000 (around NZ$90,000). But a press release is written and sent out with each list.
2. Tell credit ratings agencies about business tax debts
In Australia, this can happen when the tax debt is above A$100,000, is more than 90 days overdue, and the taxpayer is not engaging with the tax authority on repayment. This visibility is intended to inform others who are in business with, or looking to do business with, the defaulting company.
3. Make business directors personally accountable
Again in Australia, company directors can be personally responsible for certain business tax liabilities – specifically pay-as-you-go (PAYG) withholding, GST and the superannuation (Australia’s main type of retirement fund) guarantee charge.
When this happens, the Australian Tax Office issues a “director penalty notice”. After this is issued, it can only be remitted by full payment of the debt within 21 days, appointing an administrator, appointing a small business restructuring practitioner, or commencing winding up proceedings. If one of these actions isn’t taken within 21 days, the director becomes personally liable for the debt.
There is an argument that directors need protection from personal liability for tax debt incurred by their company, to ensure they are willing to engage in some level of risk taking.
However, the Australian director penalty regime is intended to minimise any incentive to engage in excessive risk taking, such as trading while insolvent.
NZ Tiny Homes goes into liquidation leaving customers with unfinished homes#NewZealand #Business #TinyHome https://t.co/P0pVdgCimC
— Infoblaze Newzealand (@InfoblazeNZ) November 16, 2022
Brianna Mcilraith
Via https://t.co/PnyTT2Lxe6 pic.twitter.com/OFkOddipAm
Quick and direct action
Quicker – and more transparent – action by Inland Revenue is likely to better contain the contagion of a failed or failing business. This would ensure that current and potential suppliers, current and potential employees, and other stakeholders are aware of the business’ financial situation.
While being more proactive in responding to failing businesses, Inland Revenue needs to support taxpayers to meet their tax obligations. There is nothing to be gained from forcing viable entities into liquidation when they have a short-term trading or cash flow problem.
But allowing unviable businesses to continue to operate with unpaid withheld tax obligations for long periods is likely to increase the negative impact on the wider community. In many cases, Inland Revenue has the potential to reduce this impact.
*Lisa Marriott, Professor of Taxation, Te Herenga Waka — Victoria University of Wellington. This article is republished from The Conversation under a Creative Commons license. Read the original article.
23 Comments
It's likely that a company continuing to operate while unable to pay its normal tax obligations such as GST, PAYE etc is trading while insolvent - making the Directors personally liable to prosecution.
The article is a good idea that raises the question why its not already std practice; I'd guess IRD are hiding behind taxpayers Privacy.
The business has become a ponzi scheme at that point. If you're defaulting on tax debt the business is pretty far gone, and presumably you've exhausted all the more normal lines of credit, which means the company's going to be saddled with hefty interest payments. Sure some companies may make it out, but many won't. Customers need protection to prevent throwing good money after bad. It would be interesting to know what fraction of companies remain solvent say 2-5 years after defaulting on tax obligations, I don't think it would be very high.
Say you are a building company and 1 shipment of plasterboard that you order whilst nz has a gib shortage turns out to be defective. The manufacturer agrees to a refund but you still need to scramble to get alternative supply quickly at inflated prices to complete jobs on time and the government has consumed all your planned buffer with new compliance costs, lockdowns and wage increases. Once the refund gets processed you are back in the black, but refunds from overseas can take months to process. Shutting down as soon as the first hint of cashflow constraints occur would result in all the clients who are relying on you essentially being out of pocket whilst awaiting the liquidation.
Sounds like that company was already borderline if they don't have sufficient lines of credit to cover replacing the delivery of a shipment of a single input material that you have to dip into money put aside for tax. It shouldn't be up to future customers to bail out current customers.
"It shouldn't be up to future customers to bail out current customers." No, that scenario was implicit in a Supreme Court case a few years ago.
https://duncancotterill.com/insights/supreme-court-releases-decision-on…
"...it is not legitimate to ‘rob Peter to pay Paul’.”
Default in your context would be paying late? as majority will be wound up by IRD prior to five years passing, if they truly default, that is not payng, and the amount is material, IRD get involved in 60 percent of the initiating wind ups in NZ.
Many actually work out if it and do use IRD as cashflow. In the non profit sector this happen very frequently and the cashflow issue is an often caused by a government contract actually paying contractually late.
Skinny in equity is a systematic problem in NZ business and non for profits alike.
Calling it a Ponzi ignores the realities of the economy which is made of by smaller entities, often inadequate funding options to start with …
sure there is a consumer protection problem however NZ economy is more nuanced than you appreciate.
In the process of getting a new roof. Up to 20 week lead time. 50% deposit down on acceptance of quote. Went with a reputable company with many years of trading, including checking the companies register.
But I'll be begging at the back of the queue if they were to go into liquidation, particularly if my deposit was used to provide temporary cashflow. If only it were legislated that any deposits over a certain value are to be held in a trust account with the bank, and released by mutual agreement. We already do this with tenancy bonds.
I tried minimum half a dozen roofing companies in Wairarapa/Wellington. Only 2 came back to me with a quote, and 1 just rocked up out of the blue 3 weeks after I had accepted a quote.
There are a lot of social houses in Masterton getting upgraded, some streets there are at least 10 properties with scaffolding and part way getting brand new roofs. We just had to pull the trigger due to a couple of minor leaks.
Nzdan
Another approach you could take to reduce risk would be to go direct to one of the top manufacturers of roofig materials such as Monier for tiles or a long-standing supplier of Coloursteel; take your house-plan in and ask them to estimate the quantities of roofing materials you would need for your re-roofing. Then go to a roofing retail supplier for a quote based on the quantities required and, if acceptale, ask if you can open an account with them if you will always keep your account well in credit. If they agree, then you can see if you can find a roofie who will install the new roof by "labour only"; you can then pay them progress payments for their labour. You pay the supplier direct for the roofing materials.
My father and I used this method very successfully for spec building three home units in 1979. It worked well. But we lost our shirts because of the huge property down-turn at the time.....a down-turn far worse than now or anything since.
Good idea! Not sure how that'll go down with the roofers though, cutting their lunch on materials so they push up their Labour rate, and it runs hourly instead of a lump sum. Or I get some cowboy roofer just starting out who butchers the job and then scarpers.
The company I'm using has been around 60 years and has maintained regular communication so not stressing.
50% down 20 weeks ahead of the job is far too much. It sounds like they have cashflow problems. It would be reasonable to pay no more than 10% to book your slot, with the other 40% say a month before installation date to cover the materials being cut.
And since you already live in the house I believe you don't need to install expensive scaffolding if you do the job yourself. Just don't fall off.
Great article. Love this sort of content.
On a side note (and somewhat tongue-in-cheek, but also seriously) I've done alright in business so far avoiding deadbeat debtors and delinquent receivables by 'judging a book by its cover' on the following criteria:
- Google the company name and the director name(s) before doing business. I can think of several instances where I've done this and found everything from anonymous complaints on forums that have been prescient in nature, to one builder who had a fully-blown Stuff investigative journalism series about his trail of destruction. I usually like to look at what other companies a director might be involved with via the companies register. I appreciate you can "strike out" and do well with another company, but look for patterns.
- Also check the comments on any content posted on social media. That's often hard for a company to moderate effectively (especially smaller businesses with little time) so can be a good source of truth.
- A preponderance towards the latest Ford Ranger/ute or German SUVs indicates a higher-than-average likelihood of doing a runner with your money. #facts
- Clothes maketh the man, and when the clothes are too flashy they maketh the signs of a man who is compensating for something in the financial trouser department, but equally too scruffy in appearance might indicate a genuine broke-ass.
I hate to be a cynic, but maybe IRD should also possibly publish actual tax debt owed, and tax debt penalties owed, separately. Also I would trust the IRD people as far as I could kick them when it comes to being accurate about the amounts owed by any specific entity.
IRD went soft on businesses over Covid at the direction of the government and some have taken advantage of that. If you couldn’t pay PAYE and GST then, you’re not going to be able to pay it now with interest and penalties compounding. They are taxes held on trust usually for a month or two, and you are trading while insolvent if you can’t make those obligations. Trading while insolvent for long periods only increases the fallout when they inevitably go under. It seems to take many years for IRD to move on these characters and I don’t have much sympathy for them. The author’s ideas are good ones. I would love to see the current list of defaulters and suspect it is larger than it ever has been.
There is no reason at all why businesses should have to collect tax on behalf of their employees for the IRD. The IRD should have to pay for the collection direct from those employees rather than imposing costs on businesses. And given the IRD's powers of coercion (guilty until you prove yourself innocent), I'm not sure that allowing them to name and shame is useful at all. What Ms Marriot doesn't tell you is the number of screw ups that the IRD make that insist that tax is owed. That's the difference between being a life long academic and actually working in tax and having to deal with the IRD.
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