A Week in Review

Liability as Agent

A recent TRA decision made me think it might be useful to provide some narrative on when a person can be made personally liable for the income tax and GST debts of their company, a question which often arises from clients.

Both income tax and GST legislation contains a provision, that the Revenue can assert applies to make a person liable as agent of their company, for the GST and/or income tax debts of the entity. It is most often used when the company has been placed into liquidation, and the Revenue finds itself with empty pockets.

The relevant provisions are section HD 15 of the Income Tax Act 2007, and section 61 of the Goods and Services Tax Act 1985. The wording of the latter essentially refers to the former, as appropriately modified. The title of section HD 15 is suggestive of the type of scenarios it may be applied to – Asset Stripping of Companies.

In order for the agency principle to be applied, there must have been an arrangement entered into in relation to a company, the effect of that arrangement being that the company is unable to meet a tax liability (whether existing at the time or post the arrangement), and it is reasonable to conclude that a purpose of the arrangement was to have that effect, and that a director making reasonable inquiries could have anticipated at the time of the arrangement that the income tax (GST) liability would likely be required to be met.

The section has a few carve-outs, particularly where the Commissioner is a party to the arrangement, however it can apply to both directors and shareholders of the company, although usually only when the relevant person has benefited personally from the arrangement. Where directors are made liable under the section, that liability is joint and several.

A director can potentially escape liability, whether either they did not derive any benefit from the arrangement and at the first reasonable opportunity post becoming aware of the arrangement they recorded their dissent with both the company and the Commissioner, or they were not involved in the executive management of the company at the time and can show therefore that they had no knowledge of the arrangement.

The agency liability of a shareholder is somewhat more limited, requiring them first to be either a controlling shareholder (>50% interest) or an interested shareholder (reasonable to conclude from the size of the benefit received by the person that they were a party to the arrangement), and if so, limiting their exposure to the greater of the market value of the persons interest in the company at the time of the arrangement and the value of the benefit received from the arrangement.

As a final caution, provided the time bar limit does not apply, even if the company has been formally liquidated, the Revenue can still raise an assessment for the taxes payable as if the company had not been liquidated.

Hopefully this narrative can assist you with relieving some of your clients concerns about their potential liability for tax debts of their companies. If their business fails and they walk away with nothing, unlikely the Revenue will be trying to dig further into their already burning pockets.

Richard Ashby BBus, CA, CPA PARTNER
Em: [email protected] Ph: +64 9 365 5532 Fx: +64 9 309 5260 Mb: +64 21 823 464