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Income Tax Act 2007

Taxation of certain entities - Agents

HD 15: Asset stripping of companies

You could also call this:

“Rules for companies trying to avoid tax obligations”

This section applies when a company enters into an arrangement that prevents it from meeting its tax obligations. These obligations can include income tax, civil penalties, or other amounts payable under tax laws.

For this section to apply, it must be reasonable to conclude that the arrangement was intended to have this effect. Also, if a company director had made reasonable inquiries, they should have been able to anticipate that the tax liability would need to be paid.

There are some exceptions to this rule. It doesn’t apply if the tax commissioner is part of the arrangement, if the tax obligation is just income tax directly resulting from the arrangement and has been paid, or if the company was under special management at the time.

If this section does apply, all the company’s directors at the time of the arrangement are treated as agents of the company for the tax obligation. They are jointly responsible for paying it. However, a director isn’t liable if they didn’t benefit from the arrangement and formally disagreed with it, or if they weren’t involved in running the company and didn’t know about the arrangement.

People who own a large portion of the company or benefit significantly from the arrangement can also be held responsible for the tax obligation, but their liability is limited.

If a company has been liquidated, the tax commissioner can still assess it for income tax as if it hadn’t been liquidated. The commissioner will name one or more people as responsible for this tax obligation.

This section doesn’t apply to tax years where the company filed its returns on time before being liquidated, and the commissioner didn’t assess the company within four years after the end of the tax year when it was liquidated.

The section also defines important terms like ‘controlling shareholder’, ‘director’, and ‘interested shareholder’.

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View the original legislation for this page at https://legislation.govt.nz/act/public/1986/0120/latest/link.aspx?id=DLM1517413.

Topics:
Money and consumer rights > Taxes
Business > Industry rules
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Part H Taxation of certain entities
Agents

HD 15Asset stripping of companies

  1. This section applies when—

  2. an arrangement has been entered into in relation to a company; and
    1. an effect of the arrangement is that the company cannot meet a tax liability (the tax obligation) whether existing at the time of the arrangement or arising after that time, for—
      1. income tax:
        1. a civil penalty, as defined in section 3(1) of the Tax Administration Act 1994:
          1. an amount payable under Part 7 of that Act; and
          2. it is reasonable to conclude that—
            1. a purpose of the arrangement is to have the effect described in paragraph (b); and
              1. if a director of the company at the time of the arrangement made reasonable inquiries, they could have anticipated at the time that the income tax liability would, or would likely, be required to be met.

              2. This section does not apply to an arrangement if—

              3. the Commissioner is a party to the arrangement:
                1. the tax obligation is no more than an amount of income tax that arises as a direct result of the performance of the arrangement, and that obligation has been met:
                  1. at the time of the arrangement, the company was under statutory management under the Banking (Prudential Supervision) Act 1989 or the Corporations (Investigation and Management) Act 1989.

                    1. All persons who are directors of the company at the time the arrangement is entered into are treated as agents of the company in relation to the tax obligation, and the liability is joint and several. But a director has no liability if—

                    2. they do not derive a benefit from the arrangement, and at the first reasonable opportunity after becoming aware of the arrangement, or the aspects of the arrangement that cause this section to apply to it, they record formally their dissent in relation to the arrangement with the company and with the Commissioner; or
                      1. they were not at the relevant time involved in the executive management of the company and had no knowledge of the arrangement, or the aspects of the arrangement that cause this section to apply to it.

                        1. A person who is a controlling shareholder or an interested shareholder at the time of the arrangement is treated as an agent of the company in relation to the tax obligation other than penalties and interest but, despite section HD 3(2), the liability is limited to the greater of—

                        2. the market value of the person’s direct and indirect shareholding in the company at the time of the arrangement; and
                          1. the value of the benefit that the person derives from the arrangement.

                            1. A person who is a controlling shareholder or an interested shareholder at the time of the arrangement is treated as an agent of the company in relation to penalties and interest in proportion to their liability for the tax obligation under subsection (4).

                            2. In order to give effect to this section, if a company has been liquidated, the Commissioner may at any time after the liquidation make an assessment of a company for an income tax liability of the company as if it had not been liquidated. The time bar applies, but this subsection overrides other provisions in this Act and the Tax Administration Act 1994.

                            3. In making an assessment under subsection (6), the Commissioner must nominate 1 or more persons as having the tax obligation set out in the assessment. The nominated person or persons are treated as agents of the company in relation to any notification or objection procedure concerning the assessment.

                            4. No liability arises under this section for a tax year in relation to which—

                            5. a company has provided returns within the time allowed by section 37 of the Tax Administration Act 1994 for providing returns for the tax year in which the company is liquidated; and
                              1. the Commissioner has not issued a notice of assessment of the company for the tax year before the end of 4 years following the end of the tax year in which the company is liquidated.

                                1. When applying sections YC 2 to YC 6 (which relate to voting and market value interests) for the purposes of the definitions of controlling shareholder and interested shareholder in subsection (9), the reference to company in sections YC 2 to YC 6 includes a company that is acting in the capacity of trustee.

                                2. In this section,—

                                  company includes a company that is acting in the capacity of trustee

                                    controlling shareholder, for a company, means—

                                    1. a person whose voting interest or market value interest in the company at the time of the arrangement, together with any interests of an associated person, is 50% or more; and
                                      1. if the person or associated person is a company, the voting interest or market value interest of the person or associated person is calculated as if they were not a company and as if sections YC 4 (Look-through rule for corporate shareholders) and YC 6 did not apply

                                        director means,—

                                        1. a person who occupies the position of director, whether or not the position has that title:
                                          1. for an entity that is treated as a company under this Act, a person who acts in the same or similar way as a director would if the entity were a company incorporated in New Zealand under the Companies Act 1993

                                            interested shareholder means a person who, at the time the arrangement is entered into, has a voting interest or market value interest in the company, calculated in either case if the person is a company as if the person were not a company, and because of the size of the benefit that the person derives from the arrangement, it is reasonable to conclude that the person is a party to the arrangement

                                              penalties and interest means a civil penalty or amount payable under Part 7 of the Tax Administration Act 1994 that is part of the tax obligation.

                                              Compare
                                              Notes
                                              • Section HD 15(2)(c): amended, on , by section 300(1) of the Reserve Bank of New Zealand Act 2021 (2021 No 31).
                                              • Section HD 15(8B) heading: inserted, on , by section 119(1) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                                              • Section HD 15(8B): inserted, on , by section 119(1) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                                              • Section HD 15(9) company: inserted, on , by section 119(2) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                                              • Section HD 15(9) controlling shareholder paragraph (b): amended, on , by section 119(3) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).
                                              • Section HD 15 list of defined terms trustee: inserted, on , by section 119(4) of the Taxation (Annual Rates for 2017–18, Employment and Investment Income, and Remedial Matters) Act 2018 (2018 No 5).