A 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)