None of it has worked. The phoenix companies keep rising, the tax debts keep mounting, and honest businesses keep subsidising their dishonest competitors.
Perhaps it is time to look beyond our shores for an effective solution.
Consider how three countries handle the same basic scenario: a construction company that files its GST and PAYE returns but uses the cash to pay suppliers instead of remitting it to the tax authority.
Adopting systems like those in Australia and Germany could hold directors personally liable sooner. Photo / Rafael Ben-Ari/Chameleons Eye
In New Zealand, Inland Revenue might eventually force the company into liquidation. But by then, as mentioned before, the cupboard is typically bare. If the company is simply struck off the register for non-compliance, Inland Revenue faces the expensive process of restoring it just to confirm there are no assets. Either way, the directors walk away.
In Australia, the tax office issues a Director Penalty Notice within 21 days. Directors must either pay the debt, place the company into voluntary administration or begin liquidation. If they fail to act, personal liability attaches automatically with no court action required. If the company has not filed a return for three months, the penalty becomes “locked down”. Directors become personally liable even if they subsequently liquidate the company.
In Germany, if a company cannot pay its debts, directors have about three weeks to file for insolvency. If it keeps trading beyond that point while not paying tax, directors face both personal liability and potential criminal charges.
The German system does not wait for debts to accumulate. It forces action at the first sign of trouble.
Weak enforcement allows some directors to abandon failing companies and walk away from their tax liabilities. Photo / 123rf
The differences become starker when directors try more sophisticated schemes. Take the classic phoenix play: transfer the plant, equipment and customer lists from OldCo to NewCo, leaving OldCo saddled with tax debt.
In New Zealand, Inland Revenue could theoretically use section HD15 of the Income Tax Act to pursue the directors. But this requires proving intent to defeat tax liabilities – a high bar – and funding a liquidator to bring the claim. In practice, it rarely happens. The phoenix rises unscathed.
Germany makes such transfers personally dangerous. Directors who fail to file for insolvency on time become liable for any payments made after the company became insolvent, including asset transfers. The insolvency administrator can claw back transactions at undervalue.
Weak enforcement allows some directors to abandon failing companies and walk away from their tax liabilities. Photo / Dean Purcell
Directors who thought they were being clever find themselves personally on the hook.
The German approach is not draconian; it is preventive. It recognises a simple truth: once tax debts have accumulated to unrecoverable levels, enforcement becomes pointless. The only effective solution is to force directors to confront reality early, when there is still something to save or distribute fairly.
This does not punish business failure. The German system includes clear safe harbours for directors who act responsibly. If they are in financial trouble but file for insolvency within the prescribed timeframe, they are protected.
The liability only bites those who ignore their duties, who drift along hoping something will turn up while debts mount.
Current measures to prevent tax avoidance by directors are ineffective and easily circumvented. Photo / Jason Dorday
New Zealand could adapt this approach to our circumstances. Rather than Germany’s three weeks, we might allow 30-90 days – enough time to address temporary cashflow problems or seek advice, but not enough to strip assets and disappear. Directors would know exactly what is expected and when. No more grey areas, no more expensive litigation, no more phoenixes.
The broader principle matters as much as the money. When companies can use unpaid GST and PAYE as free working capital, they gain an unfair advantage over honest competitors.
A construction firm that diverts its tax obligations to fund operations can underbid the firm that pays on time. The market rewards cheating instead of efficiency.
Most directors run their companies responsibly and would welcome a level playing field. The only losers from reform would be those whose business model depends on leaving others to pick up their tab – hardly a constituency worth protecting.
Seven hundred million dollars should concentrate minds. That is real money that could fund real services instead of subsidising corporate irresponsibility.
Other countries have solved this problem. By learning from them, New Zealand can do the same.
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