Dave Ananth wants the Government to recognise that its one-size-fits-all tax compliance regime is not fit for purpose for most small businesses, especially when business conditions are so weak

As Budget 2026 approaches, much of the discussion will again revolve around familiar themes; growth, productivity, spending restraint, infrastructure, borrowing, and whether New Zealand should tax more, spend less, or somehow attempt both simultaneously.

But there is another issue quietly developing beneath the surface of the economy which deserves far greater attention.

Tax debt.

Not simply as a compliance issue or a revenue collection problem, but as an increasingly important economic indicator.

For years, tax debt was largely viewed as something associated with failed businesses, phoenix operators, or people deliberately avoiding their obligations. That still exists. But increasingly, that is no longer the full picture.

Today, many otherwise viable businesses are carrying Inland Revenue debt simply to survive.

That should concern policymakers.

New Zealand’s overdue tax and entitlement debt reached approximately $9.3 billion at 30 June 2025, an increase of approximately +16.5% on the previous year. GST debt increased from approximately $2.8 billion to $3.3 billion, employer activities debt rose from approximately $1.5 billion to approximately $2 billion, and more than 527,000 taxpayers had overdue debt obligations with Inland Revenue.¹

Inland Revenue itself has acknowledged that much of the recent increase reflects the economic conditions businesses have faced in recent years, and that older debt becomes progressively harder and more expensive to recover.²

That matters because it suggests much of the debt is no longer simply temporary disruption or short-term cashflow pressure.

Increasingly, it appears to be becoming structurally embedded within parts of the economy itself.

This should not automatically be interpreted as widespread avoidance or deliberate non-compliance.

From a practical business perspective, many otherwise viable businesses are now operating under sustained financial pressure. Inflation, wages, insurance costs, interest rates, rent increases, merchant fees, software subscriptions, and regulatory compliance obligations have all continued rising simultaneously over recent years.³

The modern SME owner is no longer simply running a business.

Increasingly, they are also managing a large compliance framework around the business itself.

A small subcontracting, retail, or hospitality business may now simultaneously manage payday filing, KiwiSaver obligations, GST compliance, AML onboarding requirements, employment compliance, health and safety systems, digital filing obligations, merchant fees, software subscriptions, and ongoing reporting obligations before meaningful profit is even retained.

Many SMEs are effectively running two operations, the actual business itself, and the compliance machinery required to keep regulators satisfied.

This reality is still rarely acknowledged honestly in public discussions.

Successive governments have promoted digitisation and automation as mechanisms which would supposedly simplify compliance. In practice, many businesses now operate within increasingly complex subscription-based compliance ecosystems which continue expanding in both cost and administrative burden.

For many SMEs, compliance no longer means occasional interaction with Inland Revenue. It now involves continuous subscription-based administration across payroll systems, accounting platforms, AML verification systems, merchant providers, and digital reporting obligations.

At the same time, tax obligations often do not align neatly with commercial cashflow realities.

GST liabilities can arise before invoices are paid.

PAYE obligations remain fixed regardless of whether customers themselves are paying late.

Provisional tax rules continue assuming future profitability in sectors where volatility has become increasingly normal.

The result is that tax debt is increasingly becoming part of ordinary business survival management.

GST may temporarily become working capital.

PAYE arrears may quietly accumulate.

Inland Revenue instalment arrangements may remain in place for extended periods.

Debt rolls forward quarter after quarter, not necessarily because businesses are irresponsible, but because many are attempting to remain operational while navigating difficult economic conditions.

None of this removes the importance of compliance.

Inland Revenue must still collect revenue and deliberate non-compliance must continue being dealt with firmly.

But there is also a broader economic question which deserves attention.

Are current compliance structures, tax timing rules, and administrative expectations still properly aligned with the commercial realities many businesses now face?

That question becomes increasingly important because there is a significant difference between temporary non-compliance and structural economic stress.

Inland Revenue itself now operates in a difficult environment. It must balance revenue collection with wider economic considerations.

Stronger enforcement may improve short-term collection figures, but excessive pressure can also contribute to business failure, reduced future tax capacity, lost employment, and wider economic contraction.

Recent increases in Inland Revenue initiated liquidations and bankruptcies should therefore be viewed carefully. Inland Revenue’s latest publicly available quarterly overdue debt report, covering October to December 2025, recorded overdue tax and entitlement debt of approximately $9 billion at 31 December 2025. Inland Revenue had liquidated 310 companies and bankrupted 83 individuals in the year to date to December 2025, compared with 228 companies and 31 individuals over the same period in the previous year.⁴

Liquidation and bankruptcy are often the visible endpoints of financial distress, not necessarily its beginning.

Long before formal insolvency occurs, many businesses quietly move into survival mode.

Directors defer drawings.

Personal savings disappear.

Creditors are staggered.

Retirement planning stops.

Working capital evaporates.

And increasingly, stress and disengagement begin replacing confidence.

There are also behavioural dimensions which policymakers should not underestimate.

The same patterns can be observed in the overseas student loan system.

For years, enforcement tools have continued expanding, penalties, collection powers, border interventions, and overseas compliance activity. Yet despite this, overseas-based student loan repayment compliance remains materially lower than domestic repayment compliance levels.⁵

The issue is not whether repayment obligations should exist. They should.

But systems function most effectively when people continue believing participation remains achievable and realistic.

Once people begin viewing a system as permanently punitive or impossible to realistically escape, disengagement risks increase regardless of enforcement intensity.

Some stop communicating.

Some leave permanently.

Some psychologically write the debt off even while penalties continue accumulating.

That broader behavioural issue deserves careful consideration as tax debt continues growing across the economy.

There is a growing danger that policymakers begin viewing debt recovery funding as the primary solution without properly examining the underlying drivers behind the debt itself.

If businesses are structurally struggling under compliance costs, cashflow pressure, and economic volatility, then simply increasing collection intensity may worsen the cycle rather than resolve it.

Governments increasingly budget on the assumption that tax debt is collectible.

Many businesses increasingly operate on the assumption that tax debt is survivable.

That gap matters.

Once rolling tax arrears become viewed as commercially normal rather than exceptional, the integrity of voluntary compliance itself begins weakening.

None of this means New Zealand should weaken compliance standards or tolerate deliberate avoidance.

Serious non-compliance must still be dealt with firmly.

But there is a significant difference between targeting deliberate abuse and building an economic environment where ordinary businesses slowly become trapped inside rolling debt structures simply to continue operating.

Budget 2026 therefore needs to look beyond headline revenue forecasts and enforcement allocations.

It needs to ask harder questions.

Are provisional tax settings still realistic for volatile sectors?

Have compliance obligations become disproportionate for SMEs?

Are businesses spending too much time servicing administration instead of productivity?

Has tax administration become increasingly detached from commercial reality?

And perhaps most importantly, are we still treating tax debt primarily as an isolated enforcement issue when it is increasingly becoming an economic systems issue?

These are uncomfortable questions.

But ignoring them will not make the underlying pressures disappear.

Because tax debt is no longer sitting at the edges of the economy.

Increasingly, it is becoming embedded within it.

^Footnotes

1. ^{Inland Revenue, “Tax and entitlement debt statistics”, recording overdue tax and entitlement debt increasing to approximately $9.3 billion at 30 June 2025, including GST debt of approximately $3.3 billion, employer activities debt of approximately $2 billion, and 527,000 customers with overdue debt obligations.}
2. ^{Inland Revenue Annual Report 2025, noting that recent increases in debt reflect prevailing economic conditions and that older debt is progressively harder and more costly to recover.}
3. ^{Reserve Bank of New Zealand economic indicators, Stats NZ inflation and business cost data, and MBIE business insight reporting relating to wage pressure, operating costs, interest rates, and SME trading conditions during 2024–2026.}
4. ^{Inland Revenue, “Managing overdue tax debt, October to December 2025”, the latest publicly available quarterly overdue debt report at the time of writing, recording overdue tax and entitlement debt of approximately $9 billion at 31 December 2025 and noting that Inland Revenue had liquidated 310 companies and bankrupted 83 individuals in the year to December 2025, compared with 228 companies and 31 individuals over the same period in the previous year.}
5. ^{Inland Revenue Annual Report 2025 and overseas student loan compliance reporting relating to repayment behaviour and enforcement activity involving overseas-based borrowers.}

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*Dave Ananth is a principal at Meridian Partners, specialising in IRD disputes, enforcement, and student loan matters. His background, profile and contact details are here.