Opinion
Dave Ananth
Auckland, November 1, 2024
New Zealand’s business landscape, particularly within the retail, hospitality, and construction sectors, is sending distress signals at unprecedented levels. The economy is navigating rough waters, with the construction industry leading the downturn into increasingly troubled financial territory.
Recent data highlights a sharp increase in company liquidations, insolvencies, and the ripple effects of an economic slowdown marked by decreasing consumer spending, inflationary pressures, and elevated interest rates. Amid this financial turbulence, one area stands out as requiring closer scrutiny and potential reform: the Inland Revenue Department’s (IRD) role in issuing statutory demands, which, while legally warranted, at times lacks understanding of the complex struggles facing many businesses.
A snapshot of the current situation is sobering. September saw record numbers of liquidated companies, with the construction sector particularly hard hit. This downturn is widespread, affecting major centres such as Auckland and Canterbury, where insolvency rates surged 47% and 38% year-on-year, respectively. But it is not just the construction industry under pressure; retail and hospitality sectors are also struggling, with liquidations up, reflecting the depth of distress across New Zealand’s business landscape.
Economic Toll and IRD’s Response
As New Zealand’s revenue authority, the IRD plays a crucial role in maintaining tax revenue stability, especially post Covid-19. However, the department’s more aggressive debt collection strategies come at a potential cost to businesses already on the edge. By issuing statutory demands to businesses barely managing to survive, the IRD risks exacerbating the financial strain on key industries.
The construction sector, for instance, faces a crisis of its own, driven by rising costs and dwindling demand. These businesses, already under financial stress, are left with few options: meet tax demands or face liquidation, an often irreversible outcome. The question, therefore, is whether statutory demands are always the best approach or if the IRD could adopt more flexible, consultative measures that consider the unique situations of struggling businesses.
Critical Need for Dialogue
In today’s economic climate, an adversarial relationship between businesses and the IRD serves neither party. Instead, a partnership focused on economic resilience and compliance is essential. Many within the business community may feel that the IRD’s approach lacks empathy and practical understanding. Nearly 60% of liquidation applications originate from the IRD a figure that spiked during Covid-19 when many businesses had deferred payments and took loans to stay operational.
While the government rightly emphasizes compliance, failing to distinguish between intentional tax evasion and earnest businesses struggling to meet obligations only leads to more financial casualties. By offering more flexible options, such as tailored repayment arrangements, and demonstrating a willingness to engage in dialogue, the IRD could play a critical role in supporting struggling businesses rather than undermining their recovery potential. Unannounced visits to construction sites as part of IRD’s debt-collection initiatives feel invasive to companies already stretched thin, furthering an environment of mistrust rather than fostering collaboration.
Broader Economic Repercussions
The broader economic and social consequences of aggressive debt collection practices cannot be ignored. An estimated 474,000 New Zealanders are currently behind on mortgage or credit card payments, indicating financial strain not only on businesses but also on their employees. When companies are forced into liquidation, employees lose their income, destabilizing households and reducing discretionary spending, which further fuels the cycle of economic decline.
While the IRD’s commitment to enforcing compliance is vital, there is a pressing need to reassess how and when statutory demands are deployed. Liquidation should be a last resort, after dialogue, understanding the business if there is a chance of a turnaround or buyout. By prioritizing open communication, instalment arrangements, and tailored debt solutions, the IRD could offer a lifeline to businesses that still have the potential to recover and contribute to the economy—even if they require additional time.
A Call for Change
Given these economic pressures, the IRD’s current approach would benefit from reorienting towards a more supportive and context-sensitive stance. Working closely with companies to understand sector-specific cash flow challenges and economic stressors would allow the IRD to support economic stability while ensuring compliance. This compassionate approach would not only align with the spirit of public service but also prove economically prudent by allowing struggling businesses to “survive till 25” and beyond.
In an era where every Kiwi business matters, IRD must prioritise empathy in its approach, an approach that first seeks to understand and assist before resorting to statutory demands. Such a shift would not only safeguard economic vitality but also promote a collaborative environment where businesses can weather the storm, recover, and ultimately contribute to New Zealand’s long-term prosperity.
Dave Ananth is Special Counsel at Stace Hammond Lawyers based in Auckland. He is also a member of the Indian Newslink Legal Panel and President of the New Zealand Malaysian Business Association based in Auckland.
