New Zealand's tax authority has recently released an important ruling that provides protections for directors of companies that continue to carry on a business despite struggling with the financial impact of the COVID-19 pandemic.
The ruling (Public Ruling BR PUB 20/06) relates to provisions in the Income Tax Act and Goods and Services Tax Act that can be used by the Inland Revenue Department to hold directors jointly and severally liable for unpaid tax: Section HD 15(1) of the Income Tax Act (ITA) and Section 61 of the Goods and Services Tax Act (GSTA).
In May, New Zealand enacted legislation to make changes to the country's insolvency and corporate law with a view to supporting businesses through the COVID-19 pandemic.
These amendments included:
- adding a "business debt hibernation" regime to allow companies and other entities to enter into agreements with their creditors in relation to existing debt;
- adding a safe harbour for insolvency-related directors' duties;
- extending statutory deadlines;
- enabling Registrars to issue exemption notices in relation to compliance with statutory obligations; and
- providing relief for entities that cannot comply with rules in their constitutions because of COVID-19.
The IRD ruling describes the operation of a COVID-19 safe harbour for directors of a company, who, acting in good faith, continue to carry on business, including trading and incurring obligations.
This safe harbour applies from April 3, 2020, until September 30, 2020 (or later, if the period is extended by regulation). It was introduced in response to concerns that companies will be voluntarily liquidated prematurely because of directors' concerns relating to personal liability.
The ruling provides that, during the safe harbour period, a decision by the directors of a company to keep on trading, as well as decisions to take on new obligations, will not result in a breach of the duties in sections 135 and 136 of the Companies Act.
Sections 135 and 136 of the CA provide that a 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; or
- 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.
The ruling states that a company's directors can rely on the safe harbour only 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 December 31, 2019 (or the company was incorporated on or after January 1, 2020, but before April 3, 2020); and
- 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 ruling states, "for the avoidance of doubt, this Arrangement does not include any particular 'arrangement' entered into in relation to a company that, on its own terms, would ordinarily be subject to [Section] HD 15 of the ITA or [Section] 61 of the GSTA, even if it is entered into during the safe harbour period."
The guidance explains that for Section HD 15 of the ITA to apply, four requirements must be satisfied:
- An arrangement is entered into in relation to a company;
- The arrangement has an effect that the company cannot meet a tax liability (either an existing liability or one that arises later).
- It is reasonable to conclude that a purpose of the arrangement is that the company cannot meet or will not be able to meet a tax liability.
- It is reasonable to conclude that if a director of the company at the time of the arrangement had made reasonable inquiries, they could have anticipated that the tax liability would, or would likely, be required to be met.
The IRD in the ruling states: "The Commissioner's view is 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; or
- 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 ruling provides extra details on the safe harbour and examples.
- Claiming New Zealand's Research and Development Tax Incentive
- New Zealand Best Place To Do Business in 2020
- Roles & Responsibilities Of A Company Director
- US Tax Residency Guidance For Those Stranded As A Result Of COVID-19
Disclaimer: The blog does not represent taxation or legal advice and that independent advice should always be sought in respect of such matters etc.