Notice of defence struck out

Summary

The Commissioner's notices of defence in proceedings relating to two section HK11 assessments were struck out.

Facts

The third and fourth disputants (C & G) were assessed under section HK11 as being personally liable for the tax assessed on a company of which they were directors and shareholders. They applied to strike out the Commissioner's notices of defence.

A Ltd was in receivership and reached a compromise with its creditor. Under the compromise, in consideration for a payment the creditor assigned A Ltd's debt to the family trusts of C & G. A Ltd continued to claim deductions for interest payments and its tax losses were transferred to another company. In early 1998 C & G's shares in A Ltd were sold to H for nominal consideration.

A Ltd was removed from the register of companies in July 2000 for failing to file an annual return. In August 2000 the Commissioner sought to have A Ltd restored to the register, but this move was opposed by H. The Commissioner took no further steps to have A Ltd restored.

In March 2001 the Commissioner issued an amended assessment to A Ltd for the 1993 income tax year. The Commissioner, in his covering letter stated that he held C & G jointly and severally liable for the 1993 income tax liability of A Ltd under section HK 11.

Counsel for C & G submitted that based on the legislative history of section HK11, the Commissioner was required to have alleged in his statement of defence that the assets of A Ltd were stripped for the benefit of C & G.

Decision

The Authority considered the legislative purpose of section HK11 by examining its history. Its equivalent provision was first enacted in 1937 to stop gold mining companies from distributing all of their capital via dividends before they were assessed for income tax. The speech of the Minister of Finance in 1991 amending section 276 of the Income Tax Act 1976 was then considered. This speech made reference to asset stripping and depletion. The Authority then considered the decision of the High Court in Spencer v Commissioner of Inland Revenue (2004) 21 NZTC 18,825 which had also made a reference to depletion of assets.

Against this background, the Authority held that the legislative intent behind the section was clear. There must be an arrangement that results in the company being unable to pay its tax. The hearing authority must then consider whether there is something about that arrangement which produces that result. That "something" must involve the depletion of assets. The Authority further held that this stripping or depletion of assets must be to the benefit of the director assessed under section HK11.

The Authority held that section HK11 is not a general recovery provision. This aspect of the decision is based on the dicta comments of Thomas J in BNZ Finance v Holland (1997) 18 NZTC 13,156 at 13,176.