A total of 92 companies in the building sector went into liquidation in the year to May 23, according to the Ministry of Business, Innovation and Employment.
Inland Revenue is increasingly taking action against construction and property investment firms for unpaid taxes, Deloitte restructuring head says.
David Webb, who is Deloitte’s national lead on restructuring, said his staff were handling more enquiries from companies in the property sector, who were often asking for help.
Webb was not surprised at the numbers coming forward, with many companies propped up by the likes of the wage subsidy scheme and discounted loans from banks during the pandemic.
“There was a level of stress in our economy in late 2019, which in normal circumstances would have seen either people exit or close their businesses,” he said.
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Inland Revenue (IR) spokesperson on outstanding tax debt, Richard Philp, confirmed the department was increasing its debt collection activities.
“Until recently, IR has been more focused on supporting businesses that have been affected by Covid and qualified for various Government Covid support payments.”
Which businesses were contacted was based on the amount of tax outstanding and the nature of the tax, Philp said.
“For example, we give a high priority to any business that has failed to pay employer deductions when due,” he said.
“We collect unpaid tax and determine the viability of a business to ensure there is a level playing field for all and as a result this supports the integrity of the tax system.”
Philp said eligibility for the Government’s Covid support payments did not take into account whether a business had a tax debt.
Trouble in construction have been recognised by the chief executives of Master Builders and the New Zealand Building Industry Federation, who both believe the sector is entering a bust cycle.
There have also been a number of applications by IR to put high-profile property investment companies into liquidation, including three run by “queen of property” Nikki Connors.
It was not companies carrying small tax debts that were under the microscope, Webb said, but those with large amounts of unpaid GST or PAYE tax bills.
Harder to broker property deals
Webb said property investors were finding themselves trying to broker deals in an environment where property prices were falling as the cost of production was going up.
“On the demand side you’ve got house prices softening, due to rising interest rates and pressure of living costs,” Webb said.
“On the supply side you’ve got access to materials, cost escalation, and labour shortages, so that’s what’s challenging development, and that’s the construction industry.
Webb said it was valid to ask whether some property investment firm’s models still worked in the current environment.
First home buyer Rahul Srivastav’s home was almost complete when the construction company building it went into liquidation.
He said if current business models were to work, investment firms would have to find funders willing to endure the pain of falling house prices and increased costs until one of the two pressures relaxed.
“You need to find financiers who are willing to provide some headroom,” Webb said.
Funders tighten their purse strings
Webb said purse strings were being tightening regardless of whether the funder was the Government, banks, or wealthy individuals and shareholders.
“They are actually saying we are not going to supply any more funding, and they are putting it back on the business owners to fund their way through this now.”
Webb said the high-risk high-reward nature of the construction industry meant it was a sector that tended to struggle before others.
Advice from IR
Philp’s advised any business that had not paid its tax to contact IR as soon as possible.
“Usually the longer you wait, the bigger the problem becomes,” he said.
Having an accurate cash flow forecast was essential to setting up a sustainable payment arrangement with IR.
“Setting up a payment arrangement as early as you can, will also stop unnecessary debt growth from late payment penalties. And in appropriate circumstances, IR can even limit the extent of use of money interest charges.”