Directors could pay the price over proposed tax changes

Company directors could be subject to more tax risk if a recommendation from the Interim Report of the Tax Working Group (TWG) is implemented.

The TWG has been considering a range of matters affecting tax in New Zealandand is concerned about companies that collect PAYE and GST on behalf of the Crown, but don’t pay it to the IRD. Often when a company becomes insolvent, one of the largest creditors is the IRD, which is owed overdue PAYE and GST.

To improve the collection of unpaid PAYE and GST, the TWG has recommended directors become personally liable through a system that operates in Australia, the Director Penalty Notice regime. It operates by giving notice to directors outlining the amounts of tax owing and the options available to them.

The recovery options include garnishing money from the directors’ income and assets. For instance, by requiring employers, banks, financial institutions, and others who may owe the directors money, to make payment direct to the IRD.

What is not clear is if they recommend taking bankruptcy proceedings against a director who does not pay. Directors are already personally liable when trading while insolvent but this change would make it easier for the IRD to collect the taxes.

This approach is not unusual as banks, for instance, usually require directors of small businesses to personally guarantee a company’s banking facilities. Some creditors may also require a personal guarantee to obtain credit. The difference here is the IRD would have a statutory ability to make directors liable.

Imposing this liability may mean other creditors miss out as directors are more likely to demand the IRD are paid in preference to other creditors.

Directors will need to pay more attention to the financial aspects of their business, so they know their payments are up to date and have adequate equity to operate.

It is important to note your liability as a director is “joint and several” which means each director is 100 per cent liable for the full amount of debt. More information on whether the rules would apply to directors of trustee companies is needed.

A likely by-product of imposing this liability is the use of trusts to protect personal assets would increase so directors would not have any available assets to meet the imposed obligation.

Finding good directors could be harder as some may not be willing to take on this potential liability. And with increased risk, directors will expect higher fees.

Negating the ingrained limited liability that firms have is a bold step as it is one of the business fundamentals that allows businesses to take risk.

This is another reminder to directors to ensure they understand their responsibilities and take steps to protect their personal assets.