Tax Issues with Liquidation Start and End Dates

Today Inland Revenue issued an exposure draft on the topic of when a particular form of liquidation starts. Inland Revenue said that in the case of long-form liquidations, it is when the liquidator is appointed. The start point for liquidations is relevant to the application of s CD 26, which excludes capital distributions on liquidation from the concept of a dividend.

There are, however, contexts when you want to know when a liquidation finishes. For example, the timing around liquidation is also relevant in the context of applying s HD 15. Section HD 15 deals with asset stripping from a company so that it can’t pay its tax debts. It enables the Commissioner to recover that tax from the directors and shareholders in some circumstances.

There are rules as to when and how the Commissioner can raise assessments, to give effect to the section. One of those rules deals with raising new assessments against the company “at any time after the liquidation…as if the company had not been liquidated”.

Basically, the time bar still applies, but the starting point from which time starts running against the Commissioner is the end of the liquidation, at least in the Commissioner’s view.  Their view is that the time bar to raise an amended assessment against the liquidated company starts running only from the date on which the company is finally removed from the register of companies. In other words, it runs from the end of the liquidation process not the start.

If it ran from the start of the liquidation, then the start dates stipulated in PUB00366 would apply here as well as to s CD 26.

Given that liquidation can take a long time the take away is that if there are any risks that the asset-stripping rules might apply to a director or shareholder of the company the quicker the liquidation process is concluded, the better. Otherwise, the potential for exposure can last for considerably longer than the normal 4-year window provided in s 108 and 108A of the Tax Administration Act 1994.

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