IRD debt feels easy - until you price it
Many employers treat IRD arrears like a casual overdraft: you can "borrow" from it without applying, the money arrives instantly, and nobody asks for security. This is an expensive illusion.
Source article (Leighton Associates): IRD debt approval is easy, but what does it cost? (Peter Drennan)
What is being said in the source article?
A recent insolvency-law post by Peter Drennan (published by Leighton Associates) asks a practical question: if IRD is acting like an "involuntary lender" to struggling businesses, what interest rate are you really paying? You can read the source article here: Leighton Associates - IRD debt approval is easy, but what does it cost?
The analysis models a simple scenario: a $10,000 tax default left unpaid for 12 months with no payment arrangement. It then compares the result across four common debt types:
- GST
- PAYE (and other employer deductions)
- Income tax
- SBCS loan (the Small Business Cashflow Scheme, sometimes called the COVID loan)
The key point is not that "tax is expensive" (everyone knows that). The key point is that the penalty rules make some debts dramatically more expensive than others, and the difference can be big enough to change how an employer should triage a cashflow crisis.
The simple takeaway: PAYE is in a different category
In the model, GST and income tax grow, but remain in a range many owners would call "bad but survivable" if left untouched for a year. PAYE, however, explodes. The post describes PAYE growing to more than $25,000 from a $10,000 starting balance over 12 months.
Why the divergence? The short answer is that PAYE is treated as money you have deducted from employees and are holding on trust. The law keeps monthly incremental penalties for PAYE (and similar employer deductions) in a way it does not for GST and income tax.
How penalties drive the cost
Inland Revenue late payment penalties are front-loaded: there is an initial penalty shortly after the due date, another penalty around day seven, and then (for some debts) a monthly incremental penalty. On top of this, use of money interest (UOMI) continues to run on underpayments.
This is why a simple statement like "IRD debt is cheaper than the bank" is often wrong. The effective rate depends on:
- What kind of debt it is (PAYE, GST, income tax, etc.)
- Whether you are repeatedly late (rolling delinquency) or it is a single event
- Whether you have engaged early and obtained an arrangement
The hidden trap: always being one month behind on GST
One of the most useful parts of the analysis is the "rolling GST delinquency" scenario: the business is not sinking deeper each month, but it is consistently late. In plain language, it is always one return behind.
Because GST penalties are triggered on each new overdue amount, the business repeatedly suffers the front-loaded penalties. The analysis describes this as settling into an effective annualised cost around 71% per annum. That is an enormous financing cost, even though it may not feel like a crisis day-to-day.
Why this matters for employers
Employers often face a cashflow squeeze that looks like this:
- Wages need to be paid today.
- Suppliers need to be paid this week.
- GST and PAYE are due soon, but "we can catch up later".
This is where businesses get hurt. The penalty settings mean you can unintentionally choose the most expensive possible form of financing. You may also increase risk in areas that are not purely financial: governance pressure, insolvency risk, and (in some cases) director exposure.
Practical steps for employers
- Prioritise PAYE. If you are choosing between paying PAYE and paying almost anything else, treat PAYE as a financial emergency. If you cannot pay PAYE, you should assume your business is in serious distress and get advice immediately.
- Break the rolling GST cycle. If you are always one return behind, the best "return on effort" is often to get current once, even if it hurts, so you stop triggering the front-loaded penalties again and again.
- Engage early. Proactive engagement may open up instalment arrangements and penalty relief settings. Do not wait for enforcement letters to pile up.
- Separate your tax cashflow. Many employers reduce risk by quarantining GST and PAYE in a separate bank account. Treat it like a trust account: once it is set aside, it is not available for general cashflow.
- Get a straight solvency view. If you are behind on tax, you may also be behind elsewhere. Talk to your accountant and, if needed, an insolvency practitioner early. Waiting reduces options.
Sources and further reading
- Leighton Associates: IRD debt approval is easy, but what does it cost? (Peter Drennan)
- Inland Revenue guidance: late payment penalties and use of money interest (UOMI)
- Tax Administration Act 1994 provisions on late payment penalties and relief settings
