Sole trader with IRD debt: your options, from hardship to funding

Running your own show as a sole trader keeps life simple, right up until the tax bill falls behind. Without a company in the middle, there’s no line between the business’s debt and yours. That changes which options apply, and it means some routes open to individuals aren’t open to companies, and the other way around.

Why is sole trader tax debt different?

A company is a separate legal person. Its tax debt belongs to the company, and directors are usually only exposed through guarantees, PAYE decisions or breaches of their duties. A sole trader has no such separation. The GST, income tax and any PAYE you owe are your personal debts.

In practice, that means:

• IRD’s deduction notices can reach your personal bank accounts as well as your business account.
• Bankruptcy, rather than liquidation, is the formal end point if things go badly.
• The 2026 credit-reporting rules for tax debt apply to companies only, so your tax debt isn’t credit-reported under that scheme.
• You can apply for serious hardship relief, which companies can’t.

Is hardship relief available to you?

Yes. IRD’s options-for-relief practice statement makes clear that serious hardship relief applies to natural persons (SPS 18/04). Serious hardship is about whether paying would leave you unable to meet minimum living expenses, pay for medical treatment or similar essentials. IRD will look closely at your finances, including your assets.

Hardship relief can mean IRD writes off some or all of a debt, but it’s not a shortcut. If you own property with equity or the business is doing well, IRD is likely to expect payment. Our relief and hardship page explains how to apply and what to send.

What personal insolvency options exist?

The Insolvency and Trustee Service lists three main personal options (insolvency.govt.nz):

Option	Broadly for	Key point
Debt Repayment Order (DRO)	Unsecured debts under $50,000, where you can repay something	Repay what you can afford over time under supervision
No Asset Procedure (NAP)	Unsecured debts under $50,000, no assets and no realistic way to repay	A one-off option with lasting consequences
Bankruptcy	Larger debts (generally over $50,000)	Serious restrictions, including on running a business

These are significant decisions. Talk to the Insolvency and Trustee Service or a budgeting service before choosing one. We’re a business lender, not an insolvency adviser, and we earn nothing from any of these routes.

Still trading and want to keep it that way? See whether funding could clear IRD. It costs nothing to ask and there’s no credit check.

When can a loan help a sole trader?

A business loan to pay IRD tends to fit when:

• You own property with equity, even your home. Property-secured business loans run from $20,000 to $5,000,000.
• Your trading income is steady and visible in the bank. Cash-flow options are typically $5,000 to $500,000.
• The debt is causing active harm, such as deductions from your account or the risk of bankruptcy proceedings.
• The business is viable and you’re keeping up with new GST and income tax.

Because sole trader debt is personal, using the family home as security is a real decision. Take independent legal advice and make sure your partner or co-owner is fully on board.

Should you think about a company structure?

Many sole traders move to a company as they grow. It can bring a cleaner separation between personal and business finances, but it doesn’t erase existing tax debt, and directors take on duties of their own. If you’re considering it, talk to your accountant first. Moving the business into a company to avoid an existing debt can create serious problems.

An illustrative example

Illustrative only. Not a real client and not an offer.

A Hawke’s Bay electrician works as a sole trader and owes IRD about $48,000 in GST and income tax after a long illness. IRD has issued a deduction notice to his bank. He’s back at work with a full order book and owns a home with good equity alongside his partner. They take legal advice together, and a property-secured business loan clears IRD in one payment. The deduction notice falls away because there’s no debt left, and he moves to setting aside tax weekly.

What does IRD expect from a sole trader in arrears?

Whether you’re asking for an instalment arrangement or hardship relief, IRD wants to see the full picture. Expect questions about your income and living costs, your assets (including property and vehicles), your other debts, and whether your returns are up to date. If GST returns or income tax returns are outstanding, file them first. Until they’re in, nobody, including IRD, knows exactly what you owe.

It also helps to separate business and personal money now, even if you stay a sole trader. A dedicated business account, with a second account just for tax, makes it far easier to show IRD and lenders what the business earns and what you can afford.

What happens to the debt if you stop trading?

Closing the business doesn’t close the tax debt. Because it’s personal, IRD can keep collecting after you stop trading, including through deductions from wages if you take a job. That’s why it pays to deal with the debt while the business is still earning, and why the choice between funding, an arrangement, hardship relief and a personal insolvency option deserves careful thought.

Your next step

If you’re self-employed and behind with IRD, start a short enquiry. There’s no credit check involved, nobody sells your enquiry on, and a real person who understands sole trader tax will call you back. Please be as accurate as you can about what you owe, any letters from IRD and any property you hold, so we can tell you straight away whether funding is realistic or whether hardship or another route makes more sense.