A recent court case serves as a reminder to all company directors that they can be held personally liable to the IRD for GST owing by a company in which they are a director. Although the facts of the case involved a number of companies and inter-group loans being paid, the case serves as a valuable reminder to all directors in GST-registered companies that GST is a priority liability. One of the things about GST that is sometimes overlooked is that it is an indirect tax. The vendor or supplier charges GST, and the GST is recovered from the purchaser or the recipient. This means that generally the person responsible for accounting to the IRD for the GST has the money.
Directors therefore need to be careful when making decisions relating to a supply by a company within their control that involves GST. If for example, a block of land is sold, and there is insufficient money to repay the mortgage and account to the IRD for the GST, the director could face a similar situation as the director in the court case. The High Court set out factors that it took into account when deciding that the director should be personally responsible for accounting for the GST owing by companies he controlled.
In the court case, a director of three companies was held to be liable for the GST owing by the companies because of property sales. At the time proceeds of sale were received by the companies that included GST of $1.7 million. The director of the companies had been involved in the sale transactions. Before settlement of the property sales, the director oversaw or arranged for a number of transactions to be undertaken between companies within his control including assignments of loans.
Upon settlement of the property sale transactions, the companies used their sale proceeds first to discharge mortgages registered against the titles to the properties and secondly, to pay the costs of sale. The remaining net sale proceeds were paid to one of the companies controlled by the director in satisfaction of a debt owing to that company. Because the companies had paid away all the sale proceeds, they were unable to pay to the IRD their GST liabilities that were due on 28 September 2008. GST invoices for the $1.7 million due had been issued earlier by the solicitors acting for the companies on 6 August 2008.
The Commissioner contended that the transactions in question were steps in an arrangement, an effect of which was that the companies could not pay their GST liability on the supply of the three properties. The companies had self-assessed as being liable to pay the $1.7 million GST for the period ended 31 August 2008, but had no funds to make the payment when it was due a month later. All the companies were placed into liquidation.
The High Court held that the sale of the properties concerned converted the assets of the companies from land and buildings to cash. The net sale proceeds were then stripped from the companies under the arrangement and following the various transactions and steps that were taken, the companies were unable to satisfy their GST debts. This was the result of the arrangement. It was what the arrangement achieved irrespective of any motive otherwise which the director maintained he had.
Also the Court noted that from the director’s admission, there was no doubt that at the time of the arrangement, he had presumably made reasonable enquiries and anticipated that GST liabilities of around $1.7 million arising at the time of the supply of the properties under the sales to the Council would be required to be met. Therefore, he was held to be liable for the GST personally.
Directors are therefore reminded to take care when companies are incurring GST liabilities. If the company is not going to be able to meet the GST liability, for any reason, the director should think long and hard about the merits of the transaction and other options that may be available to the company.
If you have any questions on this topic, please contact your local Crowe Horwath tax adviser.