A Week in Review

Personal tax liability exposure clarified

IR has released BR Pub 20/06, ‘Income Tax and Goods and Services Tax – Director’s liability and the COVID-19 ‘safe harbour’ in schedule 12 to the Companies Act 1993’. The binding ruling publicises the Commissioner’s view of whether either section HD 15 of the Income Tax Act 2007 (ITA) or s 61 of the Goods and Services Tax Act 1985 (GSTA), could apply to a director who has relied on the Covid-19 ‘safe harbour’ in schedule 12 of the Companies Act 1993.

You should all be aware, that any director of a company, must not:

• Agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.
   
• Cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.
   
• Agree to the company incurring an obligation, unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so.

A director that fails to abide by the above duties, can be made personal liable for the loss caused to others as a result of their breach. Covid-19 has of course changed the landscape dramatically for many businesses, and has seen the need to introduce the ‘safe harbour’ to allow director’s acting in good faith to continue to trade, when without the concession, they would have been exposed to the risk of personal liability for their actions in doing so.

A director can rely on the safe harbour where:

• The directors consider in good faith that the company is facing or is likely to face significant liquidity problems in the next six months because of the impact of Covid-19 on the company or its creditors.
   
• The company was able to pay its debts as they fell due on 31 December 2019 (or the company was incorporated on or after 1 January 2020 but before 3 April 2020).
   
• The directors consider in good faith that it is more likely than not that the company will be able to pay its debts as they fall due within 18 months (for example, because trading conditions are likely to improve or the company is likely to able to reach an accommodation with its creditors).

The ‘safe harbour’ can be used be directors during the ‘safe harbour period’, which presently runs from 3^rd April 2020 to 30^th September 2020 (and which may be extended).

Naturally, even with the benefit of the ‘safe harbour’, companies are still going to fail due to the impact of Covid-19, and insolvency will have the likely consequence that the companies income tax and GST liabilities will not be paid.

In this regard, section HD 15 of the ITA (asset stripping of companies) permits income tax owing by a company to be recovered from the company’s directors and shareholders where an arrangement has been entered into that has an effect that the company cannot meet a tax liability. Section 61 of the GSTA provides that section HD 15 applies as if ‘income tax’ and ‘tax’ read ‘goods and services tax’.

BR Pub 20/06 confirms that section HD 15 of the ITA or section 61 of the GSTA will not apply to a company that is unable to pay a tax obligation where:

• The directors of a company facing significant liquidity problems because of the effects of Covid-19 and the resulting economic climate, decide in good faith to rely on the safe harbour and continue carrying on business.
   
• As a result of the directors’ decision to rely on the safe harbour, the company continues carrying on business and trading or incurs new obligations on ordinary commercial business terms (for example, bank loans or sales at credit).

The one exception to the Commissioner’s stated position in BR Pub 20/06, is where an opinion is formed that section HD 15 or section 61 would have applied to the arrangement regardless, notwithstanding that it was entered into during the ‘safe harbour period’.

BR Pub 20/06 contains a detailed discussion on the application of section HD 15 (so a useful read in any event to understand its potential application to your clients) and a couple of examples to illustrate the rulings application.

Updated SPS on tax payment timing

Earlier this year, AWIR covered the issue of SPS 20/01 – Tax payments received in time. However due to IR’s transformation programme and changes to payment methods and related processes introduced accordingly, IR has now updated SPS 20/01 via the release of SPS 20/04.

The standard practice statement sets out the various payment options and the type of information you will need to possess should you wish to elect to use a certain method, and then proceeds to confirm when a payment made under a respective option, will be treated by IR as having been received in time.

The primary take-outs from SPS 20/04 in my view:

• You can use your debit/credit card to pay your tax, but unless it is a child support payment or a student loan repayment made from overseas, you will incur a 1.42% fee for the convenience.
   
• If you are making an over the counter payment at Westpac or via a Smart ATM, from 1^st July 2020 you are now required to provide a barcode (obtained from your IR correspondence or you need to create one via IR’s website).
   
• You can no longer make payment by cheque unless you have obtained pre-approval from IR.
   

Payment due dates falling on weekends and public holidays are due the next working day.

You must consult…

While not tax related, having seen the recent commencement of the publishing of employment law decisions arising from actions taken by disgruntled employees against their employers as a consequence of Covid-19 related decisions made by those employers, it is important that you remind your clients, that Covid-19 has not in any way negated your clients obligations to consult with their employees and to reach agreement, prior to any reduction in the employees ordinary wage.

We ourselves had a number of clients when the wage subsidies were first announced back in March, advising that they had claimed the subsidy and questioning that did this mean that they now only had to pay their employees 80% of their normal pay. The answer – only post consultation and agreement with the affected employee can you make a reduction.

For those of your clients that did not consult, they should be on notice that all of the decisions I have seen to date, are finding in favour of the employee, requiring the employer to now paid them at least the difference between what the employee was paid, and the minimum wage for a 40 hour week (if not simply the quantum of the lost wages).

I suspect over the coming months we will see a spate of similar decisions being released by the ERA.