A new approach to director accountability could prevent hundreds of millions of dollars in tax debt from becoming unrecoverable by requiring directors to act early when financial distress emerges.
The research note, 'Responsibility before ruin: A pre-emptive fix for NZ's phoenix problem', addresses companies that accumulate large tax debts before dissolving, sometimes only to restart under a new name. It argues that current enforcement mechanisms wait until it is too late. In the 2023–24 financial year, Inland Revenue wrote off $694.5 million in tax debt, much of it from companies struck off the register where enforcement had become prohibitively expensive.
"The fundamental flaw in our system is that it only engages after tax debts have already accumulated to unrecoverable levels," says Dr Oliver Hartwich, Executive Director of The New Zealand Initiative. "By then, companies typically have no assets remaining and enforcement becomes impractical."
The research proposes a framework that prevents large tax debts from accumulating in the first place. Directors would face a statutory duty to act within a defined timeframe once GST or PAYE defaults occur – either remedying the default or initiating formal insolvency proceedings.
This early intervention prevents debts from mounting whilst companies continue to trade in financial distress.
"The system stops the problem before it develops," Dr Hartwich explained. "It creates clear expectations and incentivises timely action. Directors who respond appropriately are protected by a safe harbour. The system only engages when directors fail to act."
The note draws on Germany's legal approach to this problem and includes legislative principles showing how such a framework could be implemented in New Zealand, complete with a draft regulatory impact statement and Cabinet paper. The proposal suggests a timeframe of 30 to 90 days for directors to respond to tax defaults.
"This approach prevents the accumulation of unrecoverable debt whilst maintaining fairness for directors who manage financial distress responsibly," Dr Hartwich said.
