Tax Avoidance or Tax Evasion? A Real Case Shows the Line

A Christchurch company director was sentenced to two years and three months in prison this year. The charges related to nearly $1.4 million of unpaid PAYE and GST. The company had the money in the bank every time a payment fell due. It went to creditors, wages and personal spending instead, and Inland Revenue was paid last or not at all.

The money was there. A choice was made not to pay it. That single fact is what turns this from an ordinary cashflow problem into something much more serious, and it gives us a clean, real example of the line between tax avoidance or tax evasion in action. So what is the actual difference between the two? And what happens if you get it wrong?

Tax Avoidance or Tax Evasion? The Core Difference

Tax evasion means deliberately breaking the law to pay less tax, or knowingly not paying tax you owe. Typical examples include leaving income out of a return and claiming deductions you know are false. Inland Revenue also treats it as evasion to use deducted or withheld tax for anything other than its lawful purpose. That is exactly what happened in the Christchurch case. PAYE deductions belong to Inland Revenue from the moment they leave an employee’s pay, not to the business.

Tax avoidance is a different animal. It covers arrangements that may follow the rules on paper. The catch is that their purpose or effect of avoiding tax is more than merely incidental. New Zealand’s general anti-avoidance rule lets Inland Revenue void those arrangements and counteract the tax advantage. So avoidance is a civil matter rather than a crime. It is decided on the facts of the arrangement, not on intent to deceive. Ordinary tax planning is a third thing again. Using concessions the way Parliament intended is not a problem at all.

The Civil Penalties: From 20% to 150%

Inland Revenue can charge shortfall penalties when a tax position turns out to be wrong. The rate depends on how the shortfall came about.

What went wrong	Shortfall penalty
Did not take reasonable care	20%
Took an unacceptable tax position	20%
Gross carelessness	40%
Abusive tax position (tax avoidance)	100%
Tax evasion	150%

 

These percentages apply to the tax shortfall, on top of the tax itself and interest. Inland Revenue can also add 25% if you obstruct it, for example by destroying records or deliberately delaying enquiries. Whether something turns out to be tax avoidance or tax evasion changes the outcome dramatically, and unpaid tax adds its own cost on top either way. Late payment penalties start at 1% the day after the due date, then another 4% on day seven. For PAYE, there is also a 10% non-payment penalty added again each month the amount stays unpaid.

The Criminal Penalties: Where the Joke Stops Being Funny

In serious cases, Inland Revenue will prosecute instead of applying the evasion penalty. The Tax Administration Act sets the maximum at five years in prison, a $50,000 fine, or both. That is what the Christchurch director was sentenced under, along with charges of aiding and abetting his company.

Here is the comparison worth sitting with. A 100% shortfall penalty for an abusive tax position is a real, painful number. But set it next to up to five years in prison, and it starts to look like a slap on the wrist. Especially once you remember that a fine is not much use to Inland Revenue if you are already personally bankrupt. This director ended up exactly there, adjudicated bankrupt within months of sentencing. Evasion does not just cost more. It costs a different kind of thing entirely.

What If the Money Genuinely Was Not There?

The Christchurch case is evasion precisely because the money was available and a choice was made not to pay it. That is worth pausing on. A genuinely insolvent business that cannot pay its tax is not automatically committing tax evasion. It opens up a different problem instead, one plenty of directors do not see coming.

Directors have duties under the Companies Act 1993 that bite hardest exactly when cash is tight. Section 135 is known as reckless trading. It stops a director allowing the business to be carried on in a way likely to create a substantial risk of serious loss to creditors. Section 136 stops a director agreeing to new obligations unless they reasonably believe the company can meet them when due.

These are not hypothetical. In the Mainzeal case, the company used unpaid GST, among other unsecured creditor money, as working capital while insolvent. The Supreme Court found the directors personally liable. Inland Revenue was one of the creditors effectively funding the business. Say a company genuinely has no money to pay its tax. Continuing to trade regardless can expose directors to personal liability under sections 135 and 136. That sits on top of whatever Inland Revenue does about the unpaid tax itself. Running out of money and choosing not to pay are two different problems. Either one can end up costing a director personally.

The Criminal Proceeds (Recovery) Act: Not Just for Gangs

If you have heard of the Criminal Proceeds (Recovery) Act 2009 at all, it is probably from news stories about gang members. Houses, cars and cash seized. That association is doing something useful here. It is a fair description of how seriously the law treats significant criminal activity. What a lot of business owners do not realise is that the Act does not care who you are. It applies to anyone who has unlawfully benefited from significant criminal activity, a category that includes tax evasion.

The Act lets Police apply to the High Court to restrain and later forfeit assets connected to that offending. Police often work alongside Inland Revenue on these cases. No criminal conviction is required, because these are civil proceedings decided on the balance of probabilities. In 2025, the Court of Appeal confirmed how this applies to tax. Where tax has been evaded and not repaid, the evader has benefited from significant criminal activity in the eyes of the Act. That holds even if Inland Revenue might later recover some or all of the unpaid tax through ordinary collection action. Simply having had the use of the money, even temporarily, can count as a benefit.

Put plainly, the law puts a business owner who quietly uses PAYE and GST as free working capital in the same seriousness bracket as the organised crime cases that make the news. It is not a harmless, victimless shortcut. It has a real effect on the community and the wider economy. That is exactly the language Inland Revenue itself used when describing the Christchurch case.

If You Are Behind, Engage Early

Inland Revenue does work with owners who get there first and engage honestly. Make a full voluntary disclosure before you receive notice of an audit, and a shortfall penalty can drop by 75 to 100%. One made after first contact but before the audit begins can still reduce it by 40%. Payment arrangements exist for genuine cashflow problems too, but only if they are actually honoured. The Christchurch company entered nine separate payment arrangements with Inland Revenue and defaulted on every one. That is part of why a civil penalty turned into a prison sentence.

Budget for Tax Before You Spend It

PAYE and GST are not your money. You are holding them on the way to Inland Revenue. They should never be treated as part of your working capital. Two tools take most of the temptation, and the risk of an honest mistake, out of the decision.

Use a PAYE Intermediary

The first is a PAYE intermediary such as Smartly, a Datacom-backed, IRD-registered service. You run your payroll, and it takes the full gross cost from your business bank account. Staff and Inland Revenue both get paid automatically, PAYE, KiwiSaver and student loan deductions included, through a dedicated trust account. The money never sits in your general account waiting to be spent on something else.

Smarter Accounting Tech to Highlight your Actual Usable Balance

The second is Usable, a New Zealand cash flow tool built specifically for this problem. Usable Balance connects to your accounts and shows a live, genuinely usable balance rather than a raw bank balance. It factors in GST and other obligations that are coming due, so the number you see is what you can actually spend. It is NZ hosted with a direct IRD integration. One small business owner using it put it simply: Before Usable, spending decisions were based on gut feel and a bank balance that did not account for six-monthly GST returns. Afterwards, that was the first time in years they slept through the month their GST return was due.

Worth knowing the stakes here too. Inland Revenue is currently owed roughly $9.3 billion in unpaid tax nationally, and GST alone accounts for around $3.3 billion of that. IRD is also the largest petitioning creditor behind company liquidations in New Zealand. This is not a fringe problem.

Both are good ways to avoid getting into trouble in the first place. They are also a sensible mindset shift if you have already fallen behind and need a clearer picture to dig yourself out. If you want help setting either up, that is exactly what our virtual CFO services are for. Having a VCFO in your corner doesn’t cost as much as you think, and it can be a lot cheaper than getting it all wrong. The same goes if you want a proper cash flow forecast built around your business, not a generic template.

If you are behind on PAYE or GST, talk to someone before Inland Revenue talks to you. Get in touch with the team at MBP Advisory.

This article is general information only and is not personal tax or legal advice.