A Week In Review
Director Liable for GST Debt
The recent High Court decision in Henderson v C of IR is a clear reminder that company directors cannot hide behind the corporate veil where a company has been unable to satisfy its GST debts due to an arrangement which has had the effect of depleting its assets to a point where insufficient funds remain to pay tax liabilities. Section 61 of the GST Act 1985 refers to the application of section HD 15 of the Income Tax Act 2007 (replacing the term income tax with GST where applicable) to determine possible personal liability for directors and shareholders, for the debt where the company has been left with insufficient assets. To satisfy the provision, there must have been an arrangement entered into by the company, an effect of which was being unable to meet a tax liability (either arising at the time of the arrangement or after), with it being reasonable to conclude a purpose of the arrangement was to have that effect and that a director making reasonable enquiries at the time would have anticipated that a tax liability would or would likely be required to be met. There are a few exclusions from liability, such as where the director is not involved in the executive management of the company and had no knowledge of the arrangement, however for most SME’s this will not be the case, so the issue is certainly worthy of mention when advising clients who made be considering a “walk away” option. (Henderson v C of IR HC Christchurch (2016) NZHC 1987)
QWBA released on application of residential/main home exclusions
IR released a QWBA on 31st August providing its view on the inability to use the residential exclusion (CB 16) or main home exclusion (CB 16A) due to a regular pattern of acquiring and disposing or building and disposing. The focus of the QWBA is on what is meant by the phrase, a “regular pattern”.
Clearly, as stated in most of IR’s published views, each case will be fact specific. Whether there will be a “regular pattern” will depend on the number of similar transactions and the intervals of time between them. IR suggests however that there is likely to be no such pattern unless there are at least three prior transactions (excluding therefore the present transaction being considered) and that there has to be similarity or likeness between the transactions. Once this criteria is satisfied, its then a matter of whether the transactions have occurred at sufficiently uniform or consistent intervals to consider the pattern is regular. Reason or purpose for each transaction is irrelevant in IR’s view.
As a final point, IR notes that the exclusion from the bright-line rules cannot be used even where you do not have a “regular pattern”, if you have already used the exclusion twice in the two year period prior to the bright-line date for the land you are selling.
Employee Share Scheme Proposals
IR has released an update to their 12th May issues paper on the taxation of employee share scheme, further to submissions received to date. Other than the removal of a proposed timing deferral for start-up companies, there are no material changes to the previous document, the main focus being to ensure that the timing basis for taxing benefits received by employees under share schemes is equivalent to those used for taxing cash benefits. One arrangement which may be caught by the proposals is where the employee is issued shares which are held in trust until the employee has satisfied certain conditions (often simply remaining as an employee for a defined period), at which time full ownership of the shares is vested in the employee. Present rules tax these arrangements based on the value of the shares at the date of issue, not at the date of vesting (where it is envisaged the market value of the shares would have increased). Had an equivalent employee received a cash bonus upon achieving the same conditions (and equivalent to the market value of the shares on that date), they would have been taxed at a higher amount, an inequitable position which IR considers needs fixing. Further submissions on the updated proposals are requested to be made no later than 30th September.
Settling IRD Disputes
IR has issued an operational guideline setting out their approach to settling any dispute prior to litigation pursuant to section 6A of the Tax Administration Act 1994. The guideline acknowledges that while the starting point for any settlement is that the law should be applied correctly and IR should seek to recover all tax which is due, this is not possible in all cases. The guideline therefore provides a set of criteria which can be taken into account, depending on the particular case and establishes some principles as to how much weight should be applied to those criteria.
Richard Ashby BBus, CA, CPA
PARTNER
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