On 23 November, Grant’s column made a different case.
Companies collect GST on their sales and remit the money to the government. They also pay income taxes on behalf of their employees – PAYE.
A company that starts failing may remain optimistic about turning things around and may decide to short Inland Revenue rather than employees or suppliers. Raiding collected taxes like GST and PAYE rather than passing them along to Inland Revenue can help a company limp along for a prolonged period. Failures can be slow, and unpaid taxes can become substantial before liquidation.
New Zealand’s system makes it costly and cumbersome for Inland Revenue to pursue unpaid tax from failing businesses. That has consequences for the government’s tax take. But it also has consequences for other businesses.
If your competitor is keeping the money that they should be sending to Inland Revenue for use as working capital, they’ll have an advantage over your company until they are finally pushed into liquidation.
Companies that continue trading for months or years as tax bills pile up are a bit like zombies. They shamble on, endangering living companies, and threatening to infect others.
And if the odds of being prosecuted for not meeting your tax obligations really are around one in four hundred, as Grant suggests, two things happen.
Your company might be tempted to follow your competitor’s bad example.
And more companies in sectors with high rates of business failure will be tempted to take tax noncompliance as strategy.
That strategy is common enough to have a name: Phoenix companies. That strategy involves letting liabilities to Inland Revenue build up in an existing company, transferring the assets to a new company, and abandoning the old shell company to eventually be stricken off the companies’ register.
New Zealand already has specific ‘phoenix company’ rules – but they only apply when the new company uses the same or a similar name as the old one. Being a bit more creative in naming the new company is often enough to sidestep them.
Grant proposes one option for dealing with the problem. Inland Revenue should more quickly liquidate companies falling into tax arrears and “hold to account directors who profit from persistent breaches.”
That option places the monitoring and enforcement burden on Inland Revenue. But the amounts that Inland Revenue might expect to collect in liquidation, for companies deeply into insolvency, might not justify the effort.
This week, the Initiative’s Executive Director, Oliver Hartwich, suggested a different option modelled on Germany’s approach.
A German company unable to pay its debts when they fall due, and unable to quickly find a way to pay them, is considered illiquid.
German company directors face a strict and personal duty to file for insolvency very quickly when their company becomes unable to pay its debts.
Failing to file within a three-week grace period brings consequences. It is a criminal offence that also brings civil liability. Company directors can become personally responsible for unpaid corporate taxes.
Choosing to pay other suppliers ahead of the tax office after that point is treated as grossly negligent, and directors can be personally liable for payments made from the company’s accounts.
As Hartwich puts it,
“Crucially, this system is not designed to punish business failure, but to enforce responsible management in a crisis. A director who correctly identifies the moment of insolvency and fulfils their legal duty by filing the paperwork on time is generally protected from this personal liability. The liability is a consequence of the failure to act responsibly, not of the insolvency itself.”
Obviously, that brings a very different set of incentives. The tax office need not initiate investigations. Company directors would be financially ruined if they failed to file for insolvency when the company became unable to pay its bills, so they file quickly.
Because insolvency filings are quick, large debts cannot build up over time. Zombie companies cannot run for months or years while enjoying a tax-sized cost advantage over their competitors.
Hartwich suggests that a New Zealand version of Germany’s system could be triggered by the company’s failure to remit collected taxes, like GST and PAYE, on time. In the 2025 tax year, businesses failed to remit almost $1.5 billion in collected GST and PAYE.
Directors would then have a strict timeframe of perhaps one to three months to come into tax compliance. If they could not, they would have to put the company into administration or liquidation.
Failing to do so would make company directors liable for unpaid GST and PAYE. Judicial review could provide a safeguard for directors who took appropriate action to meet their obligations.
Following the German system directly, given difficulties in identifying exactly when a company hits a legal threshold for persistent illiquidity, would be a mistake. Some directors would resign rather than take on the risk; others would be far too quick to pull the pin on a company that could still turn things around. Failure to remit collected taxes sets a brighter line.
Ideally, the risk of director liability would mean failing companies would quickly be put into insolvency proceedings rather than accumulate growing debts to Inland Revenue. No directors would wind up being liable because the risk of liability would encourage compliance.
Hartwich encourages that this proposal be weighed alongside the Law Commission’s ongoing work looking at director liability.
Not letting zombie firms use unpaid taxes as working capital would help protect honest businesses, as well as the public purse.
Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE
New Zealand’s system makes it costly and cumbersome for Inland Revenue to pursue unpaid tax from failing businesses. That has consequences for the government’s tax take. But it also has consequences for other businesses.
If your competitor is keeping the money that they should be sending to Inland Revenue for use as working capital, they’ll have an advantage over your company until they are finally pushed into liquidation.
Companies that continue trading for months or years as tax bills pile up are a bit like zombies. They shamble on, endangering living companies, and threatening to infect others.
And if the odds of being prosecuted for not meeting your tax obligations really are around one in four hundred, as Grant suggests, two things happen.
Your company might be tempted to follow your competitor’s bad example.
And more companies in sectors with high rates of business failure will be tempted to take tax noncompliance as strategy.
That strategy is common enough to have a name: Phoenix companies. That strategy involves letting liabilities to Inland Revenue build up in an existing company, transferring the assets to a new company, and abandoning the old shell company to eventually be stricken off the companies’ register.
New Zealand already has specific ‘phoenix company’ rules – but they only apply when the new company uses the same or a similar name as the old one. Being a bit more creative in naming the new company is often enough to sidestep them.
Grant proposes one option for dealing with the problem. Inland Revenue should more quickly liquidate companies falling into tax arrears and “hold to account directors who profit from persistent breaches.”
That option places the monitoring and enforcement burden on Inland Revenue. But the amounts that Inland Revenue might expect to collect in liquidation, for companies deeply into insolvency, might not justify the effort.
This week, the Initiative’s Executive Director, Oliver Hartwich, suggested a different option modelled on Germany’s approach.
A German company unable to pay its debts when they fall due, and unable to quickly find a way to pay them, is considered illiquid.
German company directors face a strict and personal duty to file for insolvency very quickly when their company becomes unable to pay its debts.
Failing to file within a three-week grace period brings consequences. It is a criminal offence that also brings civil liability. Company directors can become personally responsible for unpaid corporate taxes.
Choosing to pay other suppliers ahead of the tax office after that point is treated as grossly negligent, and directors can be personally liable for payments made from the company’s accounts.
As Hartwich puts it,
“Crucially, this system is not designed to punish business failure, but to enforce responsible management in a crisis. A director who correctly identifies the moment of insolvency and fulfils their legal duty by filing the paperwork on time is generally protected from this personal liability. The liability is a consequence of the failure to act responsibly, not of the insolvency itself.”
Obviously, that brings a very different set of incentives. The tax office need not initiate investigations. Company directors would be financially ruined if they failed to file for insolvency when the company became unable to pay its bills, so they file quickly.
Because insolvency filings are quick, large debts cannot build up over time. Zombie companies cannot run for months or years while enjoying a tax-sized cost advantage over their competitors.
Hartwich suggests that a New Zealand version of Germany’s system could be triggered by the company’s failure to remit collected taxes, like GST and PAYE, on time. In the 2025 tax year, businesses failed to remit almost $1.5 billion in collected GST and PAYE.
Directors would then have a strict timeframe of perhaps one to three months to come into tax compliance. If they could not, they would have to put the company into administration or liquidation.
Failing to do so would make company directors liable for unpaid GST and PAYE. Judicial review could provide a safeguard for directors who took appropriate action to meet their obligations.
Following the German system directly, given difficulties in identifying exactly when a company hits a legal threshold for persistent illiquidity, would be a mistake. Some directors would resign rather than take on the risk; others would be far too quick to pull the pin on a company that could still turn things around. Failure to remit collected taxes sets a brighter line.
Ideally, the risk of director liability would mean failing companies would quickly be put into insolvency proceedings rather than accumulate growing debts to Inland Revenue. No directors would wind up being liable because the risk of liability would encourage compliance.
Hartwich encourages that this proposal be weighed alongside the Law Commission’s ongoing work looking at director liability.
Not letting zombie firms use unpaid taxes as working capital would help protect honest businesses, as well as the public purse.
Dr Eric Crampton is Chief Economist at the New Zealand Initiative. This article was first published HERE
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