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What's the Single Largest Cause of Bankruptcy in New Zealand?

AUTHOR: John Rowe

POSTED: 08 March 2013

Incompetence? Dodgy dealings? Laziness? No - it's the IRD. If someone was running around hitting people over the head with sledgehammers just for the sake of it, you'd be right to be concerned. And concerned we are, because that's exactly what the IRD have been doing. It's alarming, and in our view, both unnecessary and counterproductive.

It appears that since the global financial crisis (GFC), the IRD have become extremely aggressive on tax collection, to the extent that they are forcing people into bankruptcy and businesses into liquidation at astonishing rates. Our concern is not that those people owed money to the tax department, but that the IRD would rather ruin their lives than get any of that money back. It's not just absurd, it's alarming, and it's having dire consequences.

The IRD's pursuit of people in arrears is relentless and highly stressful, if not downright traumatic, and they seem completely unwilling to look at any kind of constructive solution. We personally know of one person driven to suicide after being pursued by the IRD, another under mental health care, and several more facing divorce. We recently had a phone call from another accountant to say the IRD want him to convince his client to go bankrupt because they're concerned that if they do it themselves he'll commit suicide! In our view, this is totally unacceptable!

It appears to stem form an inherent unhelpfulness on the part of the IRD; that they have a mission statement to make people's lives as difficult as possible, even if the department ends up financially worse off as a result. So what's going on?

The penalties regime is so aggressive that once someone gets behind it's almost impossible to get back on track.
The IRD has a two-year limit on repayment. In other words, you have to pay back everything you owe, including penalties and interest within two years. That's hard enough at the best of times, but in the current economy it's near impossible.
The IRD are completely unwilling to look at any sort of repayment arrangement that will take longer than their two-year limit. To illustrate, we have a client who owed the IRD $90,000. Now, because of penalties and interest he owes $266,000. He's offered a solution of $70,000 immediately, $20,000 in a few months, and $500 per month for the next five years. Sounds reasonable, doesn't it? But what did the IRD say? They want him to go bankrupt, which, because he has no assets, means the IRD would get nothing. It simply doesn't make financial sense!
The IRD says bankruptcy is their way of dealing with people who are inherently non-compliant. These situations could be avoided if the IRD actually stepped in to help when they notice a problem, but they don't. It's almost as if they want people to be non-compliant and go so far down the gurgler that there's no hope of recovery.
If someone is in arrears personally, the IRD will also try to nail them for debts their company may owe, despite the fact that they have no legal liability for that business debt because it's a separate limited liability entity. This is quite simply immoral! People are getting into utterly hopeless situations by taking on debt that is not legally theirs, just to try and keep the big bully IRD happy.
The IRD is taking a hostile approach to PAYE and GST arrears and heading towards criminal prosecution of business owners and directors. Yes, not paying PAYE and GST is technically stealing, but the IRD is not getting on to it fast enough or giving people a chance to sort it out.
The IRD, like many government departments, is hopeless at keeping people informed about what their responsibilities are. Not everyone has a qualified accountant, yet the IRD expects them to understand very complex issues, and slams them if they don't get it right. Very rarely does the IRD give any publicity about issues they are coming across - at best they bury it at the bottom of some public information memorandum that no one reads.

The solutions, as we see it, are very simple. The IRD should:

Inform people as soon as arrears are noticed.
Help them work out a realistic repayment schedule that maximises the return to the government, instead of sending them into liquidation or bankruptcy.
Keep the public informed about common issues the IRD comes across. If people are regularly stuffing up in a particular area, come out with accessible media campaigns to address those issues.
Help people become compliant and stay that way instead of sledgehammering them and ruining their lives. The IRD would be financially better off as a result, and the destructive stress on individuals and families could be avoided.

Our message to the IRD is: Come on IRD, the sledgehammer technique is vindictive bullying that doesn't serve the people or the government in the end. Stop stressing families, loosen up and be constructive! Don't set people up to fail - help them to succeed instead.

Our message to our clients is: Tell us as soon as you have a problem with the IRD - we are here to help. Put your hand up when it's still small. We don't charge clients for phone calls, emails and meetings, and we do a lot of this type of work on contingency - if we can't help you sort it out, then you don't have to pay us. Contact us here. And if you are not already a client, we would be pleased to meet with you to discuss how we can help - call us on +64 9 522 7955, email us on info@gra.co.nz or fill out our online form.

Request a Meeting

John Rowe
Director
Business Accounting Services

09 522-7955

jr@gra.co.nz

© Gilligan Rowe & Associates LP

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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.

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