A recent amendment to the Goods and Services Tax Act 1985 has clarified that voluntary administrators are personally liable for the GST of companies under their administration. The Inland Revenue has also issued new guidance on the GST treatment of receivers, liquidators, and voluntary administrators, replacing the initial guidance issued almost three decades ago.
GST is an important factor in any transaction, but it can be particularly troublesome where it crosses into the area of insolvency. Common issues include Inland Revenue’s status as a preferred creditor, the GST treatment of mortgagee sales, and personal liability issues in relation to insolvent companies.
In this alert, we summarise the insights gleaned from our work across a significant number of high profile and complex insolvencies as they relate to GST, taking into account the renewed guidance and recent amendments.
It’s all about priority
Several of the most contentious GST issues arise in respect of an insolvency. This is not surprising because Inland Revenue is a preferential creditor for GST and vigorously pursues GST debts. The same preferred status applies to PAYE, but given criminal penalties for non-payment of PAYE, that is usually paid ahead of GST.
Preferential right to accounts receivable
Secured creditors should be aware that, as a preferential creditor, Inland Revenue’s priority over a debtor company’s “accounts receivable” extends to almost any monetary obligation outstanding on the date of receivership or liquidation. This priority is not limited to the book debts of the company. For example, if a distressed debtor sells a secured asset such as a vehicle or machinery prior to the appointment of a receiver and the purchase price remains outstanding at the time of that appointment, the outstanding payment for that asset will be an account receivable that will accrue to the benefit of the preferred creditors such as Inland Revenue ahead of any claim of a secured creditor under a General Security Agreement.
Sale in satisfaction of debt / mortgagee sales
One of the clearest examples of Inland Revenue’s priority for GST is when a creditor exercises their right to sell property in satisfaction of a debt (e.g. a mortgagee sale). In that situation, the creditor is required to treat the sale of the property as being subject to GST and must file a special GST return and account for GST (if any) on the sale, unless the debtor would not have been required to pay GST if it had sold the property itself (based on information provided to the seller by the debtor, or a reasonable determination by the seller based on information it holds).
Beware of personal liability
Individuals acting as trustees of GST-registered trusts should be aware that the GST Act imposes liability directly onto the trustees. This can prove disastrous in an insolvency situation where property is disposed of, often at a loss, and the trustees can be left with a GST liability and a worthless indemnity out of the assets of the trust.
Receivers and liquidators (and voluntary administrators)
For GST purposes receivers and liquidators are treated as carrying on the business of the company in receivership and are personally liable for any resulting GST liability.
Recent legislative amendments (effective 1 April 2023) have clarified that voluntary administrators are personally liable for GST in the same way as receivers and liquidators. These amendments resolve the previous uncertainty on this point where some voluntary administrators would file GST returns on behalf of the company but take the view that they were not personally liable.
That said, receivers, liquidators and voluntary administrators are not personally liable for GST on supplies made before their appointment, as for that period the GST liabilities stay with the company and Inland Revenue remains a preferential creditor.
Given their personal liability for GST, past financial crises have seen receivers and liquidators seek clarification from the courts regarding GST, which in some cases have taken several years to resolve. One of these was in the context of a sale by a partnership, where the risk of personal liability saw the receivers for the partners make a voluntary payment to Inland Revenue of GST owing by the partnership ahead of payment to the secured lenders. The Supreme Court ultimately held that the receivers were not personally liable to pay the GST, as it was owing by the partnership (which was not in receivership), but the receivers were unable to recover the GST even though it was mistakenly paid. Meanwhile, the secured creditors were barred from recovering the GST pursuant to section 95 of the Personal Property Securities Act 1999, which gives a creditor who receives payment of a debt through a debtor-initiated payment priority over a security interest in the funds paid.
Given the apparent inequity of cases like that, if there is any doubt about personal liability, an escrow or tax pooling arrangement may protect receivers, liquidators and voluntary administrators against the imposition of penalties and punitive interest while the matter is being sorted out.
Mortgagees in possession
It is rare for mortgagees to take possession in New Zealand. Unlike receivers, liquidators or voluntary administrators, mortgagees in possession are not automatically personally liable for the GST of the debtor. However, if the mortgagee in possession carries on the taxable activity of the debtor, the Commissioner of Inland Revenue may deem the mortgagee to be personally accountable for GST with respect to that activity.
Directors and shareholders
Under section 61 of the Goods and Services Tax Act 1985, directors and shareholders can be personally liable for GST where the company has entered into an arrangement with the purpose of stripping assets out of company to avoid paying a GST liability.
If you would like to discuss any of the above in further detail, we encourage you to call one of our tax or insolvency experts.
This article was co-authored by Steven Liu, a senior solicitor in our Tax team.
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