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What is Director's Liability?
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Companies going into voluntary or forced liquidation may have limited liability (the extent of the money invested) but such limitations do not cover the taxes due to the Inland Revenue Department (IRD).
For instance, if a Company with $1000 as capital collapses, the liability of its Directors would be limited to $1000.
However, such limitations would not apply to IRD.
Directors liability
Directors of companies are liable to pay overdue taxes and taxes that are likely to become payable to the last day of trading.
Normally Directors are not liable for company liability unless they are found to have traded recklessly, fraudulently and not in the best interests of the company.
Directors of companies are now required to sign personal guarantees, making them liable for that secured amount. For example, lending institutions such as commercial banks take personal guarantee of a director for a business loan.
Tax liability works differently. IRD has different ways to recover monies owed in any form of tax including GST and PAYE and directors sometimes may be personally liable.
Statutory provisions
Section HD15 of the Income Tax Act 2007 imposes personal liability on controlling shareholders and directors when the company has been involved in a transaction, which has depleted its assets resulting in its inability to meet its tax obligations.
The Section comes into effect in cases where (a) an arrangement is made in relation to the company (b) as a result of the arrangement the company cannot meet its GST and income tax liability, whether such liability existed at the time of the arrangement or arose later (c) a prudent director would have expected tax dues to occur and (d) a purpose of the arrangement was to make the company unable to meet its tax obligations.
Shareholders’ liability
The above means that any arrangement that prevents a company from meeting its tax obligations will make directors and controlling shareholders responsible for the payment of that tax debt. Directors are responsible for the full amount of the tax debt, whereas shareholders would be generally responsible only for the market value of their shareholding or the value of benefit they derive from the arrangement.
Prudent approach
Directors can safeguard themselves by showing evidence of a reasonable (prudent) approach. Such an approach would include (1) regular review of the company’s tax position, ensuring that it keeps adequate accounting records (2) considering tax implications of transactions and documenting enquiries made and conclusions reached, and (3) ensuring that sufficient funds are retained in the company to meet tax liabilities.
An Example
A and B are Executive Directors of AB Limited. They sell the assets of the Company and no money is left for tax payment. IRD can apply section HD15 of the Income Tax Act 2007 to recover the unpaid taxes of the Company from A and B.
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Saurav Wadhwa is a Principal Accountant at IBBZ Accounting Limited
M Bus (TAX) PG Cert (LAW) CA CPA
Membership and Qualification:
- Masters in Professional Business Studies (Taxation) with Distinction from Auckland University of Technology
- Post Graduate Certificate in LAW, Law School at Auckland University of Technology
- Chartered Accountant(CA), New Zealand Institute of Chartered Accountants (NZICA)
- Certified Practicing Accountant(CPA), CPA Australia
- Bachelor of Commerce, Grad. Cert. in Business from Auckland University of Technology
Saurav has many years of practical experience in tax & accounting services and is the co-founder of IBBZ Accounting Limited. He is qualified both in law and accounting. Saurav has worked in various tax & accounting specialist roles for large corporates in New Zealand. He loves to work with Small Businesses.
His key focus is on:
- Tax advisory for small and family operated businesses on a wide range of taxation issues.
- Legitimate tax saving structures.
- Advising on range of new business issues.
- Ensuring business growth is attained.
- Effective cash flow planning.
Saurav specialises in Tax Disputes resolution, Tax Relief applications, Tax Debt resolution/management, and representation in Tax Audit. Saurav can represent you in Taxation Review Authority, in Tax Dispute Court Cases or he can represent you during Tax Audit Investigations.
Blend of skills in Tax laws and accounting, makes him perfect advisor for small businesses and individuals like you. Saurav understands how to safeguard your business from creditors risk, maximise the business growth and pay low taxes. He can be your good strategic and business partner. He is of a friendly nature and easily approachable.
Saurav understands the numbers very well. He is a qualified Chartered Accountant and registered with highest professional accounting bodies of Australia and New Zealand. He can help you to plan for the future to satisfy all your financial needs.
Consumed by a hunger for knowledge, Saurav has never stopped furthering his education or expanding his pool of knowledge. Nothing gives Saurav more satisfaction than assisting his clients to achieve their financial goals. His diligence, passion and accuracy has earned him a reputation as a reliable professional who strives to serve his clients above and beyond the call of his duties.
Saurav was nominated for the Best Accountant of the year and the Young Entrepreneur of the year, and his company IBBZ Accounting won the award of Best Small Business 2014. In 2015 Saurav won the award of Best Accountant of the Year.
In 2017 Saurav was appointed as a committee member to New Zealand Public Practice Board of CPA Australia.
Saurav is a dedicated family man. Saurav is very fond of outdoor activities and enjoys pretty much all outdoor activities: running, bike, motorbike, snorkel, fishing, skiing etc. Saurav, is also a self-confessed workaholic, spends some of his free time thinking about his client’s affairs and forecasting their financial future.
He can be contacted on saurav@ibbz.co.nz or 09 272 8050
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