Paying an IRD debt: loan, instalment arrangement, or both?

Tax debt is one of the most common reasons New Zealand business owners walk into the lending market. A slow quarter, a GST bill at 15% of sales you haven’t been paid for yet, provisional tax landing at the wrong moment, and suddenly Inland Revenue is the creditor you think about most. The good news is that there are several ways to deal with it, and a shopper who compares them can save real money.

What are your options for an IRD debt?

There are three broad paths:

Path	How it works	Best when
Instalment arrangement	Agree with Inland Revenue to pay the debt over time	Inland Revenue agrees to affordable terms; cash flow can meet them
Business loan	Borrow to pay Inland Revenue in full, then repay the lender	You want the debt cleared quickly, or a lender requires it
Combination	Part loan, part arrangement	A loan clears the bulk; an arrangement handles the rest

Inland Revenue says you can apply for an instalment arrangement in myIR when you have debt you can’t pay in full, or know you won’t be able to pay tax due in full by the due date. It also warns that paying in regular instalments without an agreed arrangement can still attract penalties and interest at the full rate, while an agreed arrangement means fewer penalties.

What does doing nothing cost?

Inland Revenue’s late payment penalties work in stages. A 1% penalty applies the day after the due date, then a further 4% on the seventh day after, calculated on the remaining tax including penalties. For some tax types, an additional 1% applies every month the amount remains unpaid, though GST, income tax and provisional tax are among those excluded from that monthly penalty. Interest may also apply. Inland Revenue doesn’t charge late payment penalties on unpaid tax of $100 or less, and first-time late payers within a two-year period may get a grace period.

The point for a shopper: waiting usually costs money, so choose a path early.

When does a loan beat an arrangement?

A loan can be the better buy when:

• Inland Revenue’s proposed instalments are more than your cash flow can carry;
• you want to stop penalties and interest building and the loan costs less than they would;
• another lender, or a sale or purchase, requires the tax debt to be cleared;
• the debt is causing stress that’s distracting from running the business; or
• you have a clear source of repayment, such as a seasonal upturn or an asset sale.

An arrangement can be the better buy when Inland Revenue agrees to affordable terms, the business is trading profitably, and you can keep current tax obligations up to date while you pay the old debt down.

How do lenders view IRD debt?

Lenders take tax debt seriously, because it suggests cash-flow strain and Inland Revenue is a persistent creditor. Banks are often cautious. Non-bank and private lenders are more likely to help, particularly with property security. IRD debt is considered case by case, and lenders will want to see:

1. The full picture. A current myIR statement showing every tax type owed.
2. Returns up to date. Unfiled returns are a red flag.
3. The cause. A one-off event, like a bad debt or a slow season, reads better than a long pattern.
4. The plan. How current tax will be kept up to date after the debt is cleared.
5. Security and repayment. Property security, trading strength and a realistic repayment plan.

Our documents checklist covers what to gather. If you’d like to know whether a loan is realistic for your situation, a 60-second enquiry with no credit check is a quick way to find out.

Which loan products suit tax debt?

• Second mortgages let you borrow against equity without disturbing your bank loan.
• Short-term or bridging loans suit debts that will be repaid from a known event.
• Unsecured loans can suit smaller amounts for strongly trading businesses.
• Refinancing existing lending may release equity at a lower cost, if your bank is willing.

How do you compare a loan with an arrangement?

Put both paths in dollars over the same period:

• Arrangement: total of instalments plus any remaining penalties and interest Inland Revenue indicates.
• Loan: total cost of finance from the offer comparer, including fees.

Illustrative example. A Hamilton transport company owes $70,000 in GST and PAYE after a major customer went into liquidation. Inland Revenue proposes an arrangement over 18 months, but the monthly instalments would leave the business short in winter. A non-bank lender offers a 24-month loan secured by a second mortgage over the owner’s investment property. The owner compares the total dollar cost of each, the monthly outlay and the risk to the property, and chooses a combination: a smaller loan to clear the PAYE and an arrangement for the GST balance that cash flow can carry.

What should you avoid?

• Taking on expensive short-term debt with no clear way to repay it.
• Letting new tax debts build while repaying the old one.
• Borrowing from lenders who promise guaranteed approval for an upfront fee; see scams and red flags.
• Ignoring Inland Revenue. Engaging early opens more options.

Want help choosing a path?

Tell us how much is owed, what caused it and how the business is trading. Enquiring involves no credit check, and your details aren’t shopped around to a pile of lenders; a real person works through the options with you. Please be accurate about the tax owed and any arrangement on the form, so the path we suggest is one that works. See if you qualify.