Tax Recovery Provision: Application to Civil Penalties and Interest

2005 amendment ensures that the tax recovery provision applies to civil penalties and use-of-money interest.

Section HK 11 of the Income Tax Act 2004

The law has been clarified to ensure that the tax recovery provision, section HK 11 of the Income Tax Act 2004, applies to civil penalties and use-of-money interest. 

Background

Section HK 11 of the Income Tax Act 2004 is directed at arrangements which deplete a company’s assets so that it is unable to meet its tax liabilities.  The company itself is often liquidated as part of the arrangement, or simply because the company serves no useful purpose after a transaction is completed. 

Under section HK 11, the directors and shareholders of a company can be made liable, in certain circumstances, for the unsatisfied income tax and GST liabilities of the company.  Broadly, these circumstances are when:

  • an arrangement has been entered into by the company which has the effect of leaving it unable to meet its income tax liability;
  • a director making reasonable enquiries would have been aware of this effect; an
  • a purpose of the arrangement was to have that effect.  

Key features

The tax recovery provision, section HK 11 of the Income Tax Act 2004, makes the directors and shareholders of a company liable in certain circumstances for income tax payable by the company if it is left with insufficient assets to meet its liability.  This provision also applies to a company’s GST liabilities. 

The policy intent of section HK 11 is that it should allow Inland Revenue to collect unpaid civil penalties and use-of-money interest imposed on companies from their directors and shareholders if the requirements of that provision are satisfied.  However, there was previously some uncertainty that the law achieved this policy intent.

A clarifying amendment has been made to section HK 11 to ensure that it applies to civil penalties and use-of-money interest.  This clarifying amendment is in line with the policy intent of the tax recovery provision. 

Application date

The amendment applies from the date of enactment, 21 June 2005.