Last year, Inland Revenue wrote off $694.5 million in company tax debt. Much will never be recovered because the companies that owed it no longer exist – at least not in their original form. 

Here is how the scam works. A company accumulates GST and PAYE debts. The directors continue to trade, knowing they cannot pay. When the debt becomes unmanageable, they walk away from the company, leaving nothing for creditors. Then they start a new company doing the same thing. The old company dies; a new one rises from its ashes: same directors, same business, no tax debt. 

It is called phoenix activity. And our enforcement system cannot stop it. 

The problem is not that companies fail. Businesses go under all the time for legitimate reasons. That is capitalism. 

The problem is directors who treat tax obligations as optional. Who know the system only catches up when it is too late. 

Meanwhile, responsible companies keep paying their taxes on time, every time. They face higher compliance costs and unfair competition from rivals who simply do not pay. Why should honest businesses subsidise their dishonest competitors? 

By the time Inland Revenue moves to recover unpaid tax, the company has no assets. Enforcement becomes pointless – you cannot get blood from a stone. So, the debt gets written off. 

Germany solved this problem years ago by requiring directors to file for insolvency within three weeks of the company becoming unable to pay its debts. New Zealand could adapt this principle using a clearer trigger: when GST or PAYE defaults occur. 

Directors who act responsibly get protection – a safe harbour for those doing the right thing. But those who ignore their duties face personal liability. The game stops being worth playing. 

This is not some radical anti-business measure. It is about basic fairness. 

New Zealand could adopt a similar approach, perhaps with a slightly longer timeframe – 30 to 90 days – to reflect our business environment. The framework would prevent debts from accumulating while giving directors a reasonable time to address temporary cashflow problems. 

This is a novel proposal for New Zealand, complete with detailed legislative design principles showing exactly how it would work. We hope politicians will see its merit. Seven hundred million dollars annually is serious money that could fund real services instead of subsidising corporate irresponsibility. 

The message to directors should be simple: pay your tax or shut down properly. No more phoenixes. 

To learn more about Oliver's research, read the full research note, listen to our podcast and read more in the NZ Herald and Newsroom.