A Week in Review

Richard AshbyPartner, Gilligan Sheppard

Distributing Trust’s “Goods” to Beneficiaries…

IR’s latest draft interpretation statement, PUB00281, considers the GST issues that may arise when a GST registered trust makes a distribution of goods (that form part of the trust’s taxable activity) to a beneficiary.

Since section 2A(1)(f) of the GST Act applies to treat a trustee of a trust and a beneficiary as associated persons, special rules in terms of the value of the supply (which usually occurs for nil consideration in the case of a beneficiary distribution) and the time of supply (usually the earlier of any payment being received or the issue of an invoice) will apply to the distribution.

In this respect, PUB00281 reaches the following conclusions:

  • The supply will likely be a taxable supply as it will be made in New Zealand in the course or furtherance of the GST-registered trading trust’s taxable activity (however could be an exempt supply under s 14).

Value –

  • If the recipient beneficiary is to use the goods received to make taxable supplies in the course of their own taxable activity, then sections 10(3A) and 10(3AB) likely to apply to negate the requirement to use the open market value of the goods as the value of the supply. Instead the consideration actually paid by the beneficiary will determine the supply value, which would often be nil.
  • Otherwise section 10(3) will deem the supply to be for the open market value of the goods.

Timing –

  • If the distribution vests property in the beneficiary with a right to present possession and the property is to be removed, then the time of supply will be at the time of the removal.
  • If the distribution vests property in the beneficiary with a right to present possession and the property is not to be removed, then the time of supply will be at the same time as the resolution to distribute is made (goods deemed available at this time).
  • If the distribution vests property in the beneficiary with a right to future possession, the time of supply is at the time the beneficiary is permitted to remove the goods (or they are made available if goods are not to be removed).
  • Actual legal title will not affect time of supply (e.g. a transfer delay), and may instead simply deem a bare trustee relationship to exist.
  • Distributions may trigger GST registration issues, i.e. requirement for trust to register where the deemed value of supply exceeds threshold, or to deregister where all the trust’s assets have been distributed.

The deadline for comment is 7th June 2018.

Liquidator – Rule in Re Condon Applied…

A recent High Court decision should be a reminder to all of us who may be undertaking liquidations for our clients, that personal liability for a client’s debts may arise if you fail to exercise a duty of care that a liquidator is considered to owe to creditors.

The case involved a liquidator who had basically been appointed when IR had issued a statutory demand to a corporate trustee for the trust’s tax debt which had originated from an audit. At the time the audit was still in progress, however upon its subsequent completion, the account halt was inadvertently lifted which resulted in a significant GST refund being issued to the trust, when it should have simply offset the existing tax debt.

Some 14 months later, IR realised that the liquidator had not returned the refund cheques as would have been expected, since he was aware of the existing tax debt at the time of receipt, but had instead disbursed them to the trust upon the insistence of the accountants of a new trustee of the trust, that he had no rights to hold onto them.

IR therefore applied to the Court to seek recovery of the amount (plus interest) directly from the liquidator, to which, while he accepted the corporate trustee was liable for the GST debts of the trust and that an offset should have occurred, he argued that more than mere negligence on his part was required before he should become personally liable.

The High Court found for IR, and ordered the liquidator to pay the judgement sum plus interest on the basis that:

  • He had directly caused loss to the creditor by disbursing the refunds to the trust when he was responsible to retain them for set-off purposes as required by section 310 of the Companies Act 1993;
  • He had no basis to believe that nothing was owing to IR when he received the refund cheques;
  • “RE Condon” had established the rule that liquidators are not permitted to take advantage of strict legal rights available to them if to do so would mean they were acting unjustly, unequitably, or unfairly. This rule applied to liquidators whether they were Court appointed or not because they were obliged to act in a manner consistent with the highest principles; and,
  • He had conceded his conduct in disbursing the GST refunds without taking advice was not consistent with the principles; that conduct being a breach of his common law duty of care and skill owed as liquidator to creditors.

Richard Ashby BBus, CA, CPA PARTNER
Em: [email protected]

Ph: +64 9 365 5532 Fx: +64 9 309 5260

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