The Tax Working Group’s final report on the Future of Tax in New Zealand included a recommendation that would greatly enhance the IRD’s position in the insolvency of debtor companies.

Recommendation 61 provides:

61. that, for closely held companies, Inland Revenue have the ability to require a shareholder to provide security to Inland Revenue if:

(a)  the company owes a debt to Inland Revenue.

(b)  the company is owed a debt by the shareholder.

(c)  there is doubt as to the ability/and or the intention of the shareholder to repay the debt.

It comes from an expressed desire to enhance the integrity of the tax system, and is designed to address situations where closely-held companies have both run up large debts to Inland Revenue, and are also owed large debts by shareholders via current accounts. If that company goes into liquidation, it can be very difficult to collect the current account debts owed, particularly if the shareholder holds its assets in trusts.

The structure of closely-held companies and their taxation was identified by the Tax Working Group as an area of major concern.[1] However, recommendation 61 will to some degree involve a piercing of the corporate veil, which in our view should not be considered lightly.

The Government has responded to recommendation 61 stating that it is a high priority for progression in the 2019/20 tax policy work group programme and/or other agency work.[2]

There are limited details at this time as to how the recommendation is intended to work in practice. Obvious outstanding issues for consideration include:

1. what assets the security could be over;
2. in what exact circumstances the security could be requested (ie what circumstances will give rise to a “doubt” as to repayment of the current account);
3. who the security will be provided by - the recommendation provides for it to be granted by “the shareholder”, however the intention also appears to be able to access assets held on trust;[3]
4. what happens if a shareholder does not comply; and
5. how the interaction between this right, existing security, and negative pledge obligations (for instance, in bank general security agreements) would be managed.

This proposal will be of interest (and concern) to shareholders, insolvency practitioners, and banks, and we will monitor the details as it progresses.

Contributors elizabeth.neilson@simpsongrierson.com