Tax Working Group - IRD Security - Shareholder Current Accounts

The Tax Working Group at recommendation 61 have said for closely held companies, that IRD should be granted the ability to require shareholders to provide security to IRD if debt is owed by the shareholders to the company and the company owes debt to IRD. This enhances the position of IRD in insolvency and essentially breaks the corporate veil.

Accountants need to monitor the current account positions of their clients and ensure that dividends and salaries are being declared to ensure current accounts are not overdrawn.

Recommendation 61 provides:
61. that, for closely held companies, Inland Revenue have the ability to require a shareholder to provide security to Inland Revenue if:
(a) the company owes a debt to Inland Revenue.
(b) the company is owed a debt by the shareholder.
(c) there is doubt as to the ability/and or the intention of the shareholder to repay the debt.

The impact on companies will vary. For many it will make no difference – for example, public companies, those whose directors/shareholders only receive tax paid salaries, those who annually declare a return and pay tax and where salaries equate to the amount of drawings taken, and those who pay tax and make distributions to shareholders fully imputed.

For closely held companies that routinely have a low taxable profit and material non cash tax deductible expenses resulting in cash surpluses that are paid to shareholders without the shareholders declaring income, issues will arise.

Accountants need to be more proactive for their clients and ensure current accounts are managed.

For more information refer to the following links:

Tax Working Group Interim Report pg. 111.

The Government’s response to the recommendations of the Tax Working Group – 17 April 2019 (page 6)

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