Financial Hardship Definition: What It Is and Who Qualifies

Navigating the complexities of tax obligations can be daunting, especially when financial hardship strikes. In New Zealand, the Tax Administration Act 1994 provides a framework to address these issues, offering potential relief for individuals who are struggling. But what exactly does “financial hardship” mean in this context, and who qualifies for assistance? In this comprehensive blog post, we’ll delve into the definition of financial hardship under the Act, the criteria for qualification, and the support available to those in need.

For example, financial hardship may arise from sudden unemployment, unexpected medical expenses, or a significant reduction in income, all of which can make it difficult to meet tax obligations. These examples help illustrate the types of situations where individuals might seek relief.

Financial hardship can also affect an individual's ability to pay taxes on time, potentially influencing future interactions with tax authorities and eligibility for certain relief measures.

Understanding Financial Hardship

What Constitutes Financial Hardship?

Financial hardship, in the context of the NZ Tax Administration Act 1994, refers to a situation where an individual or entity is unable to meet their tax obligations due to unforeseen circumstances or difficulties. This might include:

• Reduction or loss of income:  Sudden loss of business income or severe cashflow constraints can greatly impact your own financial stability and ability to pay for your everyday basic living costs.

• Illness or disability: Health issues that limit the ability to work can lead to significant financial strain.

• Unexpected expenses: Major unforeseen costs, such as medical bills or urgent home repairs, can quickly escalate financial burdens.

When assessing financial hardship, individuals are generally expected to provide full disclosure of their financial situation and utilize any available resources before relief is granted. For those who qualify for hardship relief, entering into an arrangement with the tax authorities—such as a repayment plan or variation agreement—is a common outcome.

Understanding the nuances of what defines financial hardship can be crucial for those seeking relief. The government acknowledges that not all individuals have the same capacity to pay taxes, and financial challenges can arise unexpectedly.

Recent Trends and Updates

As of late 2023, the New Zealand government has recognized increasing instances of financial hardship due to factors such as inflation and economic downturns. New measures are being proposed to assist taxpayers facing genuine financial difficulties. Awareness and interpretation of the term “financial hardship” are evolving, highlighting the ongoing need for clear communication between taxpayers and the tax authorities. Due to these evolving definitions and requirements, taxpayers may be asked to provide further information to support their claims for financial hardship.

Causes of Financial Difficulty

Financial difficulty can happen to anyone, often when life takes an unexpected turn. Common causes include unemployment, serious illness, or a sudden change in income or expenses. For example, losing a job can make it hard to keep up with repayments on a personal loan or mortgage, leading to financial distress. Similarly, someone experiencing family violence may find it difficult to pay bills or manage debt, as their financial situation becomes more complicated. Illness can also reduce your ability to work, making it tough to cover everyday expenses and loan repayments. Recognizing the early signs of financial difficulty—such as missed repayments, trouble paying bills, or feeling overwhelmed by debt—is crucial. If you notice these warning signs, reaching out to a financial counsellor or your lender can help you avoid further financial hardship and find a way forward.

Effects of Financial Hardship on Credit Score

Experiencing financial hardship can have a significant impact on your credit report and overall credit score. Missed repayments, default notices, or even court judgments can all be recorded on your credit report, making it more challenging to access credit in the future. However, there are steps you can take to minimize the damage. Seeking financial hardship assistance or applying for a hardship variation with your lender can help you negotiate a new payment plan or request a payment holiday, which may prevent further negative marks on your credit report. Open communication with lenders is key—they may be able to offer solutions that protect your credit while you get back on your feet. A financial counsellor can also provide independent advice on managing debt and improving your credit score, helping you make informed decisions during difficult times.

Who Qualifies for Assistance Under the Act?

Criteria for Qualification

To qualify for relief under the Tax Administration Act 1994, taxpayers must demonstrate evidence of financial hardship. The following criteria are typically taken into account:

1. Inability to Pay Tax Debts: The taxpayer must show that paying back their tax debts would leave them unable to meet essential living costs.

2. Composition of Assets: An assessment of the taxpayer’s assets may reveal that selling them would still not cover tax debts, or selling could disrupt their means of living.

3. Income Projections: Tax authorities may analyze income stability forecasts to judge whether the individual is likely to recover from their situation.

4. Documentation: Individuals must provide appropriate documentation to support their claim. This often includes:

5. Bank statements

6. Evidence of earnings

7. Bills and debts

8. Medical documents (when relevant)

9. Proof of employment

10. Medical certificate

Applicants will need to complete an IR590 form when applying for hardship relief as well as providing detailed and through documentation to support their claims.

Types of Financial Hardship Assistance Available

If qualified, here are some potential forms of relief a taxpayer may receive:

• Payment Arrangements: Flexible payment plans that may allow longer terms for settling debts. It is important to have a formal agreement in place outlining the repayment arrangement to ensure both parties understand their obligations.

• Temporary Relief: Periods where the enforcement of tax penalties or interest may be paused. The relief is typically granted for a specific period, after which normal enforcement may resume.

• Write-off of Debt: In some cases, the tax authority might agree to write off a portion of the tax debt.

These forms of relief may apply to various types of loans, including personal loans, home loans, and other consumer loans. Note that changes to the interest rate are generally not permitted as part of hardship relief.

The Role of Financial Counsellors

Financial counsellors are a vital resource for anyone experiencing financial hardship. They offer a free service that provides independent, confidential advice to help you manage debt, create a budget, and develop a realistic plan to get back on track. Financial counsellors can assist with negotiating with lenders, filling out online forms, and guiding you through the hardship application process. For example, if you’re facing financial distress due to a serious illness or unemployment, a financial counsellor can help you access financial hardship assistance and work with you to manage your debt more effectively. Their support can make a significant difference, offering practical solutions and emotional reassurance during challenging times.

Key resources include:

• National Debt Helpline: call 0800 007 007 to speak with a qualified financial counsellor.

• Local budget advice services, often run by community trusts or non-profit groups.

When to seek professional coaching for complex tax debt situations

Even with a step-by-step guide, some tax debt scenarios call for expert intervention. If your circumstances are more than just a short-term cash-flow hiccup, professional coaching can provide clarity, negotiate with confidence and ease the emotional load.

Signs you need specialised assistance

You might consider reaching out for professional support when:

• Your tax arrears are large or have built up over several years.

• Business structures, GST or other liabilities add layers of complexity.

• Multiple creditors, including the IRD, are demanding payment at once.

• You’ve started to feel overwhelmed or anxious, affecting your sleep, work or relationships.

• Disagreements with partners or family about how to tackle the debt are becoming entrenched.

If you tick more than one of these boxes, DIY solutions often fall short. Expert coaching can help you navigate intricate tax rules and keep your personal well-being on track.

Comparing tax debt relief providers in New Zealand

When shopping for support, you’ll find a range of professionals:

• Financial counsellors offer free, general advice on budgeting and negotiating with creditors—but they can’t represent you in technical tax matters.

• Chartered accountants specialise in IRD negotiations and tax law, yet they may not address the underlying stress or behavioural factors that led to the debt.

• Financial coaches combine budgeting guidance with coaching techniques, but not all have the technical tax credentials to negotiate directly with the IRD.

Key factors to weigh:

• Qualifications and licensing—ensure anyone representing you with the IRD holds up-to-date accounting or tax registrations.

• Scope of services—look for a holistic approach that covers both the numbers and your emotional resilience.

• Cost and turnaround—compare fee structures, from hourly rates to fixed-fee packages, and ask about typical timelines for submitting an IRD hardship application.

How Tax Debt Coach can streamline your application

At Tax Debt Coach, we bridge the gap between technical expertise and personal support. Here’s how we help:

• A dual-qualified team: Chartered Accountant meets Financial Therapist, ensuring your application is both accurate and empathetic.

• End-to-end service: from an initial health check and documentation gathering, to form completion, letter drafting and direct negotiations with the IRD.

• Bespoke instalment and variation proposals based on a deep understanding of your cash-flow and personal circumstances.

• Ongoing coaching to build healthier financial habits and prevent future debt spirals.

Ready to simplify the hardship process and regain peace of mind? Discover how we can guide you towards lasting financial fitness on our services page.

The Application Process

Steps to Submit a Hardship Application for Relief

1. Gather Documentation: Collect all the evidence that supports your case.

2. Consult with a Tax Professional: If possible, seek advice from tax professionals who can help navigate the process.

3. Contact Inland Revenue: Reach out to IRD either online or via telephone to discuss your situation and submit your application. This may involve filling out a specific form provided by the tax authority as part of the application process.

Important Considerations

• Clarity and Honesty: It’s essential to provide honest and detailed information about your financial situation. Lack of clarity could result in an application denial.

• Timeframe for Relief: While applications are being evaluated, it’s crucial to manage ongoing tax obligations and communicate proactively with the tax authorities. Failure to address tax debts could result in a court judgment, which may have serious legal and financial consequences.

Managing Debt During Financial Hardship

When facing financial hardship, managing debt requires a proactive and organized approach. Start by prioritizing essential debts, such as mortgage or personal loan repayments, and reach out to your lenders as soon as you anticipate trouble making payments. Many lenders offer financial hardship assistance, including hardship variations or payment holidays, which can provide temporary relief while you get your finances in order. A financial counsellor can help you review your bank statements, track your income and expenses, and identify areas where you can reduce costs. Developing a clear plan to manage your debts and sticking to a budget can help you regain control and avoid further financial stress.

Getting Back on Track After Financial Hardship

Recovering from financial hardship is a journey that requires commitment and a solid plan. Continue making repayments, even if they are reduced, and keep in regular contact with your lenders to ensure your repayment plan is still working for you. A financial counsellor can offer ongoing support, helping you manage your debt, rebuild your credit, and plan for a more secure financial future. Regularly reviewing and adjusting your budget is essential to keep your expenses in check and avoid slipping back into financial difficulty. By seeking support, communicating openly with lenders, and staying focused on your goals, you can overcome financial hardship and get back on track with your finances.

Conclusion

Understanding the definition of financial hardship under the NZ Tax Administration Act 1994 can be the key to alleviating stress from tax debts. If you or someone you know is struggling financially, assessing eligibility for relief options is a vital step towards regaining control.

We invite you to share your thoughts or experiences related to financial hardship and tax obligations in the comments below. Seeking advice or support from professionals can not only clarify the process but also provide peace of mind.