Tax Bites #25 - Lessons from a Recent High Court Decision

About the Author:

MURRAY McCLENNAN

Director at Tax Central
A chartered accountant and a member of the International Fiscal Association and the Society of Trust and Estate Practitioners, Murray has over 30 years experience in tax.

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This article focuses on a recent High Court case (Commissioner of Inland Revenue v Tower Holdings Limited).

The case itself was about the Commissioner of Inland Revenue taking steps to liquidate the company because of non-payment of tax debt. However, it also highlights several fundamental tax and company law issues.

The background is that Inland Revenue audited Tower Holdings Ltd, a property development company, in 2015. Assessments were issued for the 2016 income year for a total of a little over $7 million; $3 million of which was a shortfall penalty for evasion. Later Inland Revenue issued a default assessment for GST on the sale of properties and a shortfall penalty for failing to account for the sales. As a result, the total debt owed was $7.6 million. The parties debated the accuracy of the assessments through the disputes resolution procedure. The debt remained unpaid and eventually Inland Revenue sought to appoint a liquidator to wind up the company.

The High Court agreed that Inland Revenue had established that:

1. The company had not kept proper accounting records and was in breach of section 194 of the Companies Act (the need to keep proper accounting records and financial statements. These obligations rest with the board of directors);

2. The process of putting the company into liquidation was not vexatious or an abuse of power;

3. There was significant tax debt;

4. The company was unable to pay its debts; and

5. It was just and equitable to place the company into liquidation.

Consequently, the decision to place the company into liquidation was confirmed and liquidators were appointed.

This case highlights, and is a timely reminder of, the need to maintain proper accounting records due to both Companies Act and the Tax Administration Act requirements.

Business records must be kept for at least seven years for income tax and GST purposes. This includes bank records and other details of other financial transactions. Records may be stored on a computer system, but in such a format that Inland Revenue can use those records.

I recommend that records of land transactions, subdivision and developments be kept for much longer than the prescribed seven years as Inland Revenue may wish to review such material. In the absence of records the onus of proof rests with taxpayers and not Inland Revenue.

REMINDER – Tax issues from winding up Trusts The implementation of the Trusts Act 2019 in late January 2021 has prompted many people and advisers to review whether existing trusts should be retained. As discussed in an earlier article, there may be tax consequences of distributing assets to beneficiaries. If in doubt, seek appropriate advice.

Murray McClennan

Director
Tax Central Ltd
027        244-5365

www.taxcentral.co.nz

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