Inland Revenue says it is transitioning its Covid response from support to compliance. Photo / NZME
The economic turmoil of the Covid pandemic has meant the number of people defaulting on their taxes has skyrocketed, sparking criticism from the opposition and tax advisers that the tax agency has been too slow to to refocus
its collection efforts.
The Inland Revenue Department’s (IRD) responses to questions from Speaker of Parliament and National Party Andrew Bayly show that the number of people granted tax breaks or write-offs for tax debts more than quadrupled in the year to June 2021 and increased from 26,048 to 112,980. While that number has stabilized to some extent this year, it remains 43 percent higher than in 2020.
And the number of people with installment agreements — payment plans used to manage overdue tax debts — also nearly doubled over the same two-year period, from 17,460 to 33,478.
Figures show that nearly 400,000 people now have tax debts – that’s nearly 10 percent of the working-age population.
Bayly said he understands and supports early steps during the pandemic to cushion the economy, but now – two years later – the tax official needs to focus more on getting back to normal to prevent these problems from piling up further.
“I think everyone understood why the IRD decided not to prosecute people in the depths of the crisis, that was an appropriate response. But it’s worrying that we haven’t seen any real decline in those rates since then,” Bayly said.
He said there were risks to the integrity of the tax system as unpaid debt spread and grew.
“We’re going back to the status quo now and the big issue is whether people will look at that and say, ‘Well, I’m paying my taxes now but others aren’t,’ and it could undermine voluntary compliance,” he said.
Questions put to the IRD this week for details on the dollar values of the debt these hikes represented and historical data showing how the pandemic disrupted long-term trends have gone unanswered.
In a written statement, the IRD stressed that it had relied on support prior to complying with the regulations due to its role during the pandemic.
“Government support initiatives were at the heart of the IRD. A number of these support payments were intended to help companies when they experienced significant revenue declines,” the statement said.
“It would have been illogical and counterproductive for IRD to harass such companies over outstanding payments at this time, rather than assisting them in an appropriate core debt payment arrangement.”
IRD said it recently adjusted its approach to “include companies that have outstanding tax debts and have not taken steps to set up a payment arrangement.”
This included taking “all appropriate steps to address any future debt through the legal processes available to us,” the statement said.
Installment agreements to manage overdue taxes, which were hit hardest in 2021 as societies and economies braced for the then-unknown economic impact of the pandemic, were paid on time 90.7 percent of the time, IRD said.
Mike Shaw, director of consulting firm OliverShaw, said the past two years had been extreme and that the initial spike in tax debt and the IRD’s response was understandable.
“Obviously we’ve gone through a centennial event because of Covid and you have to keep in mind that the easiest person to not pay is the IRD.”
He said he was aware that the IRD’s focus had recently been firmly on providing Covid-related assistance and it meant the department’s traditional role as enforcer had suffered.
“IRD has certainly taken its foot off the gas – you can kind of understand that – but enforcement should clearly be a key focus now to make sure it doesn’t get out of control,” Shaw said.
PwC’s Geof Nightingale said the core tax liability increased from $15.4 billion to $19.1 billion between 2020 and 2022, but government accounts were cushioned by better-than-expected tax revenues.
“On the one hand, the steep increase in aid efforts is worrying, but on the other hand not surprising,” he said.
“Inland Revenue resources that would normally be used for tax compliance and debt collection have been redirected to provide support to taxpayers and businesses.”
That approach had to change, Nightingale said, and there was evidence of movement at the tax authority.
“In this phase of the pandemic, the IRS must now refocus its resources on tax compliance and debt management to protect the integrity of the tax system, and we can see that beginning to happen.”
Bayly said the resurgence of inflation, and with a vengeance, came at a bad time for business owners struggling with taxes and other debt. That year, it was revealed that unpaid PAYE and KiwiSaver contributions had doubled over the past five years, and Bayly feared the worst.
“Unfortunately, many business owners have already exhausted their sources of debt and tapped into other sources of funding such as family members. Failure to pay PAYE is a last but dangerous resort to keep a business afloat,” he said.