One of the questions I am regularly asked is whether the profit from selling a property will be taxable.

The answer is not always straightforward.

There is a common perception that if you buy a property as an investment and hold it for a number of years, any eventual capital gain will automatically be tax-free. That is not necessarily the case.

New Zealand’s land-sale rules are quite broad. Whether a sale is taxable can depend on why the land was acquired, what you subsequently did with it, who you were associated with and, in some circumstances, how the value of the land changed while you owned it.

The bright-line test is only one part of the picture.

Land acquired with the intention or purpose of resale – Section CB 6

The starting point is often section CB 6 of the Income Tax Act 2007.

If, when you acquired the land, you had a purpose or intention of disposing of it, any profit from the eventual sale will generally be taxable.

The intention to sell does not have to be your main or dominant reason for buying the property. It can be one of several purposes or intentions.

For example, you might buy a property because you intend to use it as a long-term investment, but at the same time have a firm intention to subdivide and sell part of the property. That intention can be enough for the land-sale rules to apply to the relevant disposal.

The intention needs to be more than a vague possibility.

A common example would be purchasing a farm that has two houses on it where, at the time of purchase, you have a firm plan to retain one house and subdivide and sell the other.

The subsequent sale may be taxable because the property was acquired with the purpose or intention of disposal.

The important point is that this is determined by looking at the circumstances at the time the land was acquired. What you intended to do when you bought the property can therefore be just as important as what you eventually did with it.

There is no 10-year time limit on the general intention or purpose test.

The bright-line test

The bright-line test is a separate rule applying to residential land.

For residential land disposed of on or after 1 July 2024, the current bright-line period is generally two years, subject to the relevant exclusions and rollover relief provisions.

The bright-line test is comparatively straightforward compared with some of the other land-sale provisions because it is primarily concerned with the period between acquisition and disposal.

However, it is important not to make the mistake of thinking that a property sale outside the bright-line period is automatically tax-free.

The other land-sale provisions continue to apply.

In other words, getting past the bright-line test does not necessarily get you past the tax rules.

Subdivision and development where the work is more than minor – Section CB 12

Another important provision applies where a person undertakes a scheme involving the development or division of land into lots.

Section CB 12 can apply where the development or division begins within 10 years of acquiring the land and the development or division work is not minor.

What constitutes “minor” is a question of fact.

Inland Revenue has issued Interpretation Statement IS 20/08, which provides detailed guidance on this issue.

The assessment looks at the circumstances as a whole. Matters that can be relevant include:

• the total cost of the work, both in absolute terms and relative to the value and nature of the land;
• the professional services involved;
• the extent of the physical work undertaken; and
• how significantly the physical nature or character of the land has changed.

My practical warning sign is when a subdivision moves beyond simply obtaining plans, surveys and professional advice and starts involving physical work that changes the land itself.

Once you are moving significant amounts of dirt, constructing roads, installing drainage or other services, I would want the tax position considered carefully.

It is not simply a question of whether a particular piece of work is physically large or small. The overall circumstances matter.

Major development or division – Section CB 13

There is also a separate provision dealing with major development or division of land.

This can apply where an undertaking or scheme involves significant development or division work.

Examples of major development work can include:

• earthworks;
• roading;
• drainage;
• contouring;
• kerbing; and
• other significant works or amenities associated with developing land.

The important point is that the tax consequences of a development do not necessarily depend on how long the land has been owned.

This means that a property which has been held for many years can still be caught by the land-sale provisions if significant development or subdivision work is subsequently undertaken.

Changes in zoning and other changes affecting land – Section CB 14

Section CB 14 deals with certain disposals where the value of the land has increased because of a change affecting the land.

This can include matters such as:

• a change in zoning;
• a resource consent or other consent;
• a decision of the Environment Court;
• the removal of a covenant or condition; or
• other specified changes affecting the land.

The provision can apply where the land is disposed of within 10 years of acquisition and at least 20% of the profit is attributable to one or more of the relevant factors.

There is a specific deduction available under section DB 28 where this provision applies. The calculation is subject to the detailed requirements of the legislation and includes a limit on the amount of the deduction.

This is an area where professional advice is particularly important because establishing whether the increase in value is attributable to the relevant change can be a factual exercise.

Property dealers and developers – Sections CB 9 and CB 10

Special rules also apply to people who are in the business of dealing in land or developing or subdividing land.

If you are in the property business, the fact that a particular property was held as an investment does not necessarily mean that a subsequent gain will be tax-free.

There are also 10-year rules that can apply where land is sold after being acquired while the taxpayer, or an associated person, was in the relevant property business.

The associated-person rules are important.

You do not necessarily have to be the property developer yourself. Your relationship with another person or entity involved in the property business can be enough for the rules to become relevant.

Builders – Section CB 11

There are similar rules applying to people associated with a building business.

Broadly, section CB 11 can apply where improvements have been made to land and, when those improvements began, the person was associated with a person carrying on a business of erecting buildings.

Again, the 10-year period is important.

The fact that the property was not purchased as part of a building business does not necessarily mean that the subsequent sale is outside the land-sale rules.

There are other rules as well

The provisions discussed above are the main land-sale provisions, but they are not the only way a profit from the sale of land can become taxable.

For example, land can be taxable under the general business income provisions or where the transaction forms part of a profit-making undertaking or scheme.

This is why I am always cautious about giving a simple answer to the question:

“I’ve owned the property for more than two years, so is the gain tax-free?”

The answer may be yes.

But it may also be no.

The reason the property was purchased, what happened to it while it was owned, what work was undertaken and the circumstances surrounding the eventual sale can all be relevant.

The lesson

The safest approach is to consider the tax position before you buy, subdivide, develop or sell land, rather than after the transaction has taken place.

The intention at the time of purchase can be important. So can the work subsequently undertaken, changes in zoning, relationships with property businesses and the circumstances of the eventual sale.

Land transactions can involve significant amounts of money, and a tax issue discovered after settlement can be expensive to fix.

The land-sale provisions are detailed and, in themselves, can be quite taxing.

If you are considering buying, subdividing, developing or selling land and there is any doubt about the tax treatment, we recommend obtaining professional tax advice early.

This article is intended as general information only and does not constitute specific tax or legal advice. The tax treatment of a land transaction depends on the particular circumstances, including the nature of the property, the reason for its acquisition, activities undertaken while it was owned and the circumstances of its disposal.

When a business experiences financial difficulty, a receiver may be appointed to protect the interests of a secured creditor and manage specific company assets or the business itself.

The appointment of a receiver can be a stressful and uncertain time for directors, employees, creditors and stakeholders. Understanding the role of a receiver and what happens during a receivership can help provide clarity around the process.

Why Is a Receiver Appointed?

A receiver is most commonly appointed by a secured creditor under a General Security Agreement (GSA) or other security arrangement.

A receiver may also be appointed:

• Under a deed or other contractual arrangement.
• By the High Court in certain circumstances.
• Where shareholder disputes or other issues place the ongoing business at risk.

A receiver is generally appointed when a company has failed to meet its obligations to a secured creditor.

The security agreement will usually define what events constitute a default. The most common reason is failure to make required payments.

What Happens When a Receiver Is Appointed?

Once appointed, the receiver takes control of the assets and business activities covered by the security agreement.

The receiver’s role may include:

• Taking control of company assets.
• Managing business operations.
• Assessing the viability of the business.
• Protecting and preserving asset value.
• Selling assets where appropriate.
• Recovering funds for the secured creditor.

The outcome of a receivership depends on the circumstances of each business.

In some cases, the receiver may stabilise the business, recover the secured creditor’s position and return control to the directors.

In other situations, the receiver may determine that the best outcome is to sell the business or realise assets, which may ultimately lead to further restructuring or liquidation.

Does the Appointment of a Receiver Mean the Business Is Over?

Not necessarily.

A receivership does not automatically mean a business will close.

A receiver may be appointed to:

• Manage a business while financial issues are addressed.
• Sell underperforming assets or parts of the business.
• Preserve value for stakeholders.
• Create an opportunity for the remaining business to continue.

The receiver will assess the business objectively and determine the best available option based on the circumstances.

What Duties Does a Receiver Have?

A receiver holds an important and challenging position.

While a receiver is usually appointed by a secured creditor, they also have obligations to act appropriately and consider the interests of the company and other affected stakeholders.

A receiver must:

• Act with due care, skill and judgement.
• Exercise their powers appropriately.
• Act in accordance with their statutory obligations.
• Seek the best price reasonably obtainable when realising assets.

A receiver must balance competing interests while working to achieve the best possible outcome in the circumstances.

Can a Business Trade Through Receivership?

Yes, in some circumstances.

A receiver may continue trading a business if they believe there is a realistic prospect of achieving a better outcome by doing so.

This requires careful analysis of:

• Historical trading performance.
• Future profitability.
• Cash flow requirements.
• Market conditions.
• The likely outcomes of alternative options.

Receivers must make decisions based on commercial reality rather than simply continuing a business without a reasonable prospect of success.

What Does a Receiver Consider When Assessing a Business?

A receiver will typically review:

• The company’s financial position.
• Existing debts and security arrangements.
• The value of assets.
• Trading performance.
• Market conditions.
• Future opportunities.

Independent valuations may be obtained to understand the likely realisable value of plant, equipment, property or other assets.

Advice for Directors, Creditors and Stakeholders

Receivership involves complex legal, financial and commercial issues.

Whether you are a director, secured creditor, unsecured creditor or stakeholder, obtaining independent advice early can help you understand your position and the options available.

At Pryde Accounting & Advisory Limited, we provide practical insolvency advice and professional insolvency services to help stakeholders navigate challenging situations.

About the Author

Hamish Pryde BBS, CA (PP) is a Chartered Accountant, Public Practitioner and Licensed Insolvency Practitioner (IP47). He advises business owners, directors and stakeholders on accounting, business advisory, restructuring and insolvency matters.

Hamish Pryde BBS, CA (PP)
Chartered Accountant | Licensed Insolvency Practitioner (IP47)
Principal – Pryde Accounting & Advisory Limited

When a business has been under pressure for some time, the decision to close can feel like the only option.

You may be dealing with unpaid taxes, creditor pressure, declining profitability or the ongoing stress of trying to keep the business operating. It is understandable that many business owners reach a point where they want to sell the business, pay outstanding debts and move on.

However, before taking action, it is important to understand the potential consequences and obtain professional advice.

The decisions made before a liquidation or business closure can have significant implications for directors, shareholders and creditors.

Paying Creditors: The Order Matters

One of the most common misconceptions when closing a business is that directors can simply sell assets and pay creditors in whatever order they choose.

In an insolvency situation, creditors must be paid according to the priority rules set out in the Companies Act 1993.

The order of payment can be complex, and paying one creditor ahead of others may create issues later.

Certain payments made before liquidation may be reviewed by a liquidator and, in some circumstances, may be recoverable as insolvent transactions.

This means a creditor who has received payment may later be required to repay those funds to the company for distribution according to the correct statutory process.

Tax Debts Require Particular Attention

Tax obligations, including GST and PAYE, require careful consideration when a company is experiencing financial difficulty.

PAYE is particularly important because it relates to deductions made from employees’ wages that are held for payment to Inland Revenue.

Directors should not ignore outstanding tax obligations or assume they can simply be dealt with after other creditors have been paid.

Understanding the company’s tax position early allows directors to consider their options and responsibilities.

Shareholder Loans and Drawings May Need to Be Reviewed

Another area often overlooked when a company is struggling is the shareholder current account.

Where shareholders have taken more from the company than they have contributed, the company may have an asset in the form of an amount owing by the shareholder.

If a company enters liquidation, a liquidator has a responsibility to identify and recover company assets for the benefit of creditors.

This may include reviewing:

• Overdrawn shareholder current accounts.
• Loans to directors or shareholders.
• Transactions involving related parties.

Consider Your Options Before Making Decisions

Closing a business is not always the only option.

Depending on the circumstances, alternatives may include:

• Restructuring the business.
• Negotiating with creditors.
• Improving cash flow management.
• Selling the business.
• Selling parts of the business.
• Entering into a formal insolvency process.

The best option depends on the company’s financial position, future prospects and obligations to stakeholders.

Seek Advice Before Taking Action

When a business is under financial pressure, early advice can provide clarity and help avoid decisions that may create additional complications.

At Pryde Accounting & Advisory Limited, we help directors understand their position, assess available options and navigate financial challenges.

As a Chartered Accountant and Licensed Insolvency Practitioner, Hamish Pryde combines accounting expertise, commercial understanding and insolvency experience to provide practical advice when it matters most.

Seeking advice early is not an admission of failure. It is a responsible step that gives directors the best opportunity to understand their options, protect value and make informed decisions.

About the Author

Hamish Pryde BBS, CA (PP) is a Chartered Accountant, Public Practitioner and Licensed Insolvency Practitioner (IP47). He advises business owners, directors and stakeholders on accounting, business advisory, restructuring and insolvency matters.

Hamish Pryde BBS, CA (PP)
Chartered Accountant | Licensed Insolvency Practitioner (IP47)
Principal – Pryde Accounting & Advisory Limited

The use of Family Trusts has been around for a very long time; hundreds of years in fact. The use of a Corporate Trustee is more recent, but I have been a big fan of the Corporate Trustee model for many years.

The concept of a Family Trust is relatively simple. You transfer assets to Trustees to hold for the benefit of the beneficiaries. The Trustees become the legal owners of the trust assets, but they hold those assets subject to the terms of the Trust Deed and for the benefit of the beneficiaries.

The important point is that a Trust is not a person or a company. A Family Trust is not a separate legal entity in the same way that a company is. The Trustees are the legal owners of the trust assets and are responsible for administering the Trust.

This distinction is important and is sometimes misunderstood.

The importance of separation

A Family Trust needs to be properly established and properly administered. It should not simply be treated as another name for the person who established the Trust.

The Trustees have responsibilities of their own. They must understand the Trust Deed, consider the interests of the beneficiaries and make decisions in their capacity as Trustees.

This is one of the reasons I have traditionally been a strong supporter of having an independent Trustee involved in a Family Trust.

An independent Trustee can provide an important degree of separation between the people who established the Trust and the people responsible for administering it.

However, having an independent Trustee is not, by itself, what makes a Trust valid. The important thing is that the Trust is genuinely administered as a Trust and that the Trustees properly exercise their responsibilities.

In other words, the paperwork is only part of the story. The way the Trust is actually operated matters.

What is a Corporate Trustee?

A Corporate Trustee is simply a company that has been appointed as the Trustee of the Family Trust.

The company acts as Trustee, rather than having a number of individuals named as the Trustees.

For example, rather than having three individuals personally named as Trustees, a company might be appointed as the Trustee of the Smith Family Trust.

The company then holds the trust assets in its capacity as Trustee.

The directors of the Corporate Trustee are responsible for managing the company and, importantly, for ensuring that the company properly carries out its role as Trustee.

The Corporate Trustee does not change the fundamental nature of the Trust. It simply provides a different way of appointing and managing the Trustees.

Why do I like the Corporate Trustee model?

The main reason is continuity.

Traditionally, a Family Trust might have three individual Trustees. If one Trustee retires, dies or otherwise needs to be replaced, the change of Trustee needs to be properly documented and the ownership of trust assets may need to be dealt with.

This can become particularly cumbersome where the Trust owns property, investments or other significant assets.

With a Corporate Trustee, the company remains the Trustee even though the directors of that company may change.

That provides a much cleaner structure.

If a director retires, the company does not cease to be the Trustee. The directors of the Corporate Trustee can change while the Corporate Trustee itself remains in place.

This is particularly useful when a Trust is intended to be a long-term structure.

It is about governance

I also like the Corporate Trustee model because it encourages better governance.

The Corporate Trustee has directors. The directors have responsibilities. Decisions can be recorded formally and the company provides a clear structure around the administration of the Trust.

The Trusts Act 2019 sets out a number of mandatory and default duties for Trustees. These include duties to know and act in accordance with the terms of the Trust, to act honestly and in good faith, and to act for the benefit of the beneficiaries or for the permitted purpose of the Trust.

There are also obligations around record keeping and the retention of important Trust documents.

In my view, this reinforces an important point: being a Trustee is not simply a name on a property title. It is a responsibility.

The role of the directors

Where a company acts as Corporate Trustee, the directors are the people who make the decisions on behalf of that company.

They need to understand the Trust and the company’s role as Trustee.

They need to be familiar with the Trust Deed, understand who the beneficiaries are, understand the assets and liabilities of the Trust and ensure that proper records of Trustee decisions are maintained.

The directors also need to understand that they are acting in a particular capacity.

They are not simply managing their own assets. They are making decisions for a company which is acting as Trustee and which holds assets for the benefit of the beneficiaries.

That distinction is important.

The role of the Appointor

Another important part of the structure is the person who has the power to appoint and remove Trustees. This person is often referred to as the Appointor, although the terminology can vary between Trust Deeds.

This role can carry significant practical power.

The Appointor may have the ability to remove an existing Trustee and appoint a replacement Trustee, subject to the terms of the Trust Deed and the law.

It is therefore important to understand exactly what the Trust Deed says about this role.

People sometimes establish a Trust without fully appreciating where the ultimate power to change the Trustees sits.

That can become particularly important when relationships change, when a family member dies or when control of the Trust is intended to pass to the next generation.

The Trust Deed should be read carefully rather than assuming that every Family Trust operates in the same way.

The Trustee’s responsibilities

The responsibilities of a Trustee are significant.

Among other things, Trustees need to:

1. Act honestly and in good faith.
2. Act in accordance with the terms of the Trust.
3. Act for the benefit of the beneficiaries, or for the permitted purpose of the Trust.
4. Know and understand the Trust Deed.
5. Properly consider the exercise of their powers.
6. Act impartially between beneficiaries where the circumstances require it.
7. Avoid conflicts of interest and not use their position improperly for their own benefit.
8. Take appropriate care in managing the Trust’s assets.
9. Keep proper records of the Trust and Trustee decisions.
10. Properly administer the Trust in accordance with the Trust Deed and applicable law.

These are not responsibilities that should be taken lightly.

The Trusts Act 2019 has brought much greater clarity to the duties and information obligations of Trustees. It also requires Trustees to retain important documents, including the Trust Deed, records of trust property, Trustee decisions and accounting records.

What happens to the Trust assets?

One of the areas that continues to cause confusion is the ownership of Trust assets.

The Trustee is the legal owner of the assets.

Where the Trustee is a company, the company is the legal owner in its capacity as Trustee.

For example, if Pryde Trustees Limited was the Corporate Trustee of the ABC Family Trust, the legal ownership of a property would ordinarily be recorded in the name of Pryde Trustees Limited as Trustee of the ABC Family Trust.

The Family Trust itself is not a company and does not own the property in its own right.

The Trustees hold the property on the terms of the Trust and for the benefit of the beneficiaries.

This distinction can sometimes cause confusion with banks and other organisations because they often use the name of the Family Trust as the customer or account name for practical reasons.

The important thing is to understand the legal capacity in which the Trustee is acting.

Is a Corporate Trustee right for everyone?

No.

I am a big fan of the Corporate Trustee model, but it is not automatically the right answer for every Trust.

There are additional costs involved in establishing and maintaining a company. There are also additional governance and administrative requirements.

The Trust Deed itself is important, and the circumstances of the family, the assets being held and the intended succession of control all need to be considered.

The structure should therefore be designed around the particular circumstances of the Trust rather than simply adopting a Corporate Trustee because someone else has done so.

Why I prefer the model

For me, the biggest advantages are continuity, governance and clarity.

A Corporate Trustee provides a stable legal entity that can continue as Trustee even when the people involved in the Trust change.

It also provides a framework within which Trustee decisions can be made and recorded.

Most importantly, it reinforces the concept that the Trust is something that needs to be properly administered rather than simply being a name attached to a collection of assets.

Family Trusts can be very useful structures, but they need to be treated seriously.

The Corporate Trustee model is, in my view, a practical and robust way of doing that.

It provides continuity where individual Trustees may change, creates a clear governance structure and can make the administration of a long-term Family Trust considerably more straightforward.

I have been a supporter of the Corporate Trustee model for many years.

I still am.

The important thing is not simply having a Trust. It is having a structure that is properly established, properly governed and properly administered.

This article is intended as general information only. The appropriate structure for a Family Trust will depend on the circumstances of the Trust, its assets, beneficiaries and Trust Deed. Specific legal, tax and accounting advice should be obtained before establishing or changing a Trust structure.

Shareholder current accounts are common in privately owned companies. They record the movement of money between shareholders and the company, including funds introduced by shareholders, drawings taken from the business, salaries, dividends and other transactions.

While a shareholder current account may seem like a routine accounting entry, it can become a significant issue if a company experiences financial difficulty or enters liquidation.

Understanding how these accounts operate and how they are treated in insolvency can help directors and shareholders avoid unexpected issues.

What Is a Shareholder Current Account?

A shareholder current account records the net balance of funds introduced to and withdrawn from a company by its shareholders.

When a company is established, shareholders often introduce working capital. These funds are recorded separately from share capital and form part of the shareholder current account.

The balance of the account can change over time:

• A credit balance may represent money the shareholder has advanced to the company.
• A debit balance may represent money the shareholder owes back to the company.

The account appears on the company’s balance sheet and can change depending on the company’s transactions.

How Does a Shareholder Current Account Become Overdrawn?

An overdrawn shareholder current account occurs when a shareholder has withdrawn more money from the company than they have contributed.

Common examples include:

• Personal expenses paid by the company.
• Drawings taken from the business.
• Funds withdrawn without being treated as salary or dividends.

An overdrawn shareholder current account is generally an asset of the company because the company has the right to recover that amount from the shareholder.

Why Managing Shareholder Current Accounts Is Important

Directors and shareholders should regularly review their current account position.

Where shareholders have personally advanced funds to a company, appropriate documentation and security arrangements should be considered. In some circumstances, registering security interests on the PPSR may help protect those advances.

Similarly, shareholders taking drawings need to ensure their current account is managed appropriately.

It is generally preferable for shareholder-employees to receive properly documented wages or salaries, with the appropriate tax treatment applied.

What Happens to Shareholder Current Accounts in Liquidation?

When a company enters liquidation, the liquidator’s role is to identify, protect and realise company assets for the benefit of creditors.

An overdrawn shareholder current account may be considered an asset of the company. If money is owed by shareholders, the liquidator may seek repayment of that amount.

Depending on the circumstances, this may involve:

• Agreeing a repayment arrangement.
• Negotiating a settlement.
• Taking further recovery action where appropriate.

Each situation depends on the facts, financial position and surrounding circumstances.

Can a Shareholder Salary Fix an Overdrawn Current Account?

In some circumstances, shareholder salaries can reduce an overdrawn current account balance.

However, there are important requirements around:

• Whether the company is solvent.
• Whether the salary is properly authorised.
• Whether appropriate records and documentation exist.
• Whether the amount is commercially reasonable.

If a company is insolvent, declaring a shareholder salary simply to reduce a current account balance may create additional issues.

What Will a Liquidator Review?

When investigating a company, a liquidator may examine shareholder current accounts and related transactions, including:

• Transactions that reduced shareholder balances shortly before liquidation.
• Transactions at unreasonable values.
• Entries that may have disguised insolvent trading.
• Significant withdrawals after the last financial statements were prepared.
• Unapproved salaries, loans or transactions.

Transactions involving directors and shareholders require careful consideration because they may be subject to review under insolvency legislation.

Directors Should Seek Advice Early

Shareholder current accounts are one example of why early advice is important when a company experiences financial pressure.

Understanding the company’s financial position, director obligations and available options allows better decisions to be made before circumstances become critical.

At Pryde Accounting & Advisory Limited, we provide practical accounting, business advisory and insolvency advice to help directors understand their position and navigate challenging situations.

About the Author

Hamish Pryde BBS, CA (PP) is a Chartered Accountant, Public Practitioner and Licensed Insolvency Practitioner (IP47). He advises business owners, directors and stakeholders on accounting, business advisory, restructuring and insolvency matters.

Hamish Pryde BBS, CA (PP)
Chartered Accountant | Licensed Insolvency Practitioner (IP47)
Principal – Pryde Accounting & Advisory Limited

Qualifying Companies (QCs) are a legacy company structure that some New Zealand businesses continue to operate.

While the Qualifying Company regime has not been available for new companies for many years, existing Qualifying Companies remain in place and can provide certain tax advantages when structured and managed correctly.

However, when a Qualifying Company experiences financial difficulty, shareholders need to understand the potential implications.

What Is a Qualifying Company?

A Qualifying Company was designed to provide some of the commercial benefits of a company structure while allowing certain tax treatment similar to a partnership.

One of the key benefits historically associated with Qualifying Companies was the ability to distribute certain capital gains without the need to wind up the company.

This provided flexibility for some privately owned businesses and family companies.

Why Does This Matter When a Company Is in Financial Difficulty?

When a Qualifying Company becomes insolvent, the tax treatment and shareholder obligations need careful consideration.

One important difference is that shareholders of a Qualifying Company may have personal exposure for certain company tax obligations.

This means that if a company enters financial difficulty, shareholders should understand whether there are potential tax liabilities that could flow through personally.

Reviewing Qualifying Company Status During Insolvency

If a Qualifying Company is experiencing financial pressure and there is little realistic prospect of returning to sustainable trading, shareholders should consider whether the existing structure remains appropriate.

The potential benefits of retaining Qualifying Company status may be outweighed by the risk of personal exposure to company tax liabilities.

The right approach depends on the individual circumstances of the company, including:

• The reason for the financial difficulty.
• The company’s tax position.
• Existing shareholder balances.
• Outstanding tax obligations.
• Future trading prospects.

Not All Insolvency Situations Are the Same

A company may become insolvent because of trading losses. In those circumstances, there may be little or no income tax exposure.

However, insolvency can arise for other reasons, including:

• Excessive shareholder drawings.
• Outstanding tax filing obligations.
• Historical profits creating tax liabilities.
• Transactions that have not been properly addressed.

Understanding the underlying cause of the financial difficulty is essential.

Seek Advice Early

When a company is facing financial pressure, understanding the implications of its structure is an important part of assessing available options.

Early advice can help shareholders and directors understand:

• Their obligations.
• Potential risks.
• Restructuring options.
• The most appropriate path forward.

At Pryde Accounting & Advisory Limited, we combine accounting, business advisory and insolvency expertise to help business owners navigate complex financial situations.

About the Author

Hamish Pryde BBS, CA (PP) is a Chartered Accountant, Public Practitioner and Licensed Insolvency Practitioner (IP47). He advises business owners, directors and stakeholders on accounting, business advisory, restructuring and insolvency matters.

Hamish Pryde BBS, CA (PP)
Chartered Accountant | Licensed Insolvency Practitioner (IP47)
Principal – Pryde Accounting & Advisory Limited

For many businesses, cash flow pressure develops gradually. Suppliers may be stretched, customers may pay slowly, and directors may find themselves making difficult decisions about which obligations to prioritise.

However, one area that requires particular attention is PAYE.

PAYE is not simply another business expense. It represents amounts deducted from employees’ wages that are held on behalf of Inland Revenue. Falling behind with PAYE obligations can be a significant warning sign that a company is experiencing financial difficulty.

Why PAYE Arrears Are Different

When a company struggles with cash flow, directors may be tempted to delay certain payments while trying to keep the business operating.

However, unpaid PAYE can create significant issues because:

• The money relates to employee deductions.
• The company has obligations to account for those amounts.
• Continued non-payment may indicate deeper financial problems.
• Directors need to carefully consider their responsibilities.

If a company is unable to meet its tax obligations, directors should take prompt action to understand the company’s position and available options.

PAYE Debt and Director Responsibilities

Directors have duties under the Companies Act 1993 to act responsibly and make informed decisions.

Where a company is insolvent or approaching insolvency, directors need to consider:

• Whether the company can realistically recover.
• Whether continuing to trade is appropriate.
• Whether new obligations can be met.
• The impact decisions may have on creditors.

Continuing to trade while insolvent, or continuing to incur debts without a reasonable prospect of payment, can expose directors to personal risk.

PAYE Debt Can Be a Red Flag

PAYE arrears are often a symptom of wider financial pressure.

Other warning signs may include:

• Regular cash flow shortages.
• Increasing creditor pressure.
• Reliance on extending payment terms.
• Difficulty paying suppliers on time.
• Borrowing to meet existing obligations.
• Falling behind on tax commitments.

These warning signs should prompt a review of the business position rather than waiting until options become limited.

Early Advice Can Create More Options

When a business is under pressure, the earlier the situation is reviewed, the more opportunity there may be to protect value and achieve a better outcome.

Depending on the circumstances, options may include:

• Improving cash flow management.
• Negotiating with creditors.
• Restructuring the business.
• Reviewing costs and operations.
• Considering a business sale.
• Exploring formal insolvency solutions.

The right option depends on the individual circumstances of each business.

A Practical Approach to Financial Difficulty

At Pryde Accounting & Advisory Limited, we work with business owners and directors to understand their financial position, identify options and make informed decisions.

As a Chartered Accountant and Licensed Insolvency Practitioner, Hamish Pryde brings both accounting expertise and insolvency experience to challenging situations.

Seeking advice early is not an admission of failure. It is a responsible step that gives directors the best opportunity to understand their options, protect value and meet their obligations.

About the Author

Hamish Pryde BBS, CA (PP) is a Chartered Accountant, Public Practitioner and Licensed Insolvency Practitioner (IP47). He advises business owners, directors and stakeholders on accounting, business advisory, restructuring and insolvency matters.

Hamish Pryde BBS, CA (PP)
Chartered Accountant | Licensed Insolvency Practitioner (IP47)
Principal – Pryde Accounting & Advisory Limited

Liquidation represents the formal end of a company’s life. While establishing a company is relatively straightforward, bringing a company’s affairs to a close is a highly regulated process requiring careful management and specialist expertise.

A company liquidation involves a number of legal obligations and can have significant implications for directors, shareholders, employees, creditors and other stakeholders.

At Pryde Accounting & Advisory Limited, we understand the complexity of the liquidation process and provide professional guidance to ensure the process is managed appropriately, transparently and in accordance with legislative requirements.

What Happens When a Company Is Liquidated?

Once a liquidator is appointed, the liquidator takes control of the company’s affairs.

The directors remain in office but cease to have control over the company’s operations. The liquidator becomes responsible for managing the liquidation process, including:

• Taking control of company assets.
• Investigating the affairs of the company.
• Reviewing the actions of directors.
• Realising assets at appropriate value.
• Communicating with creditors and stakeholders.
• Distributing available funds in accordance with statutory priorities.
• Reporting any potential offences or misconduct where required.
• Providing ongoing reports throughout the liquidation.

The role of a liquidator is to act independently and ensure the company’s affairs are dealt with fairly and according to the law.

How Does a Company Enter Liquidation?

There are several ways a company can enter liquidation.

Shareholder Appointment

Where shareholders decide the company should cease trading, they may appoint a liquidator through a special resolution.

Court-Ordered Liquidation

A company may also be placed into liquidation by the High Court, commonly following action by a creditor who believes the company is unable to pay its debts.

If a company is experiencing financial difficulty, seeking advice early can provide greater clarity around the available options.

Restrictions on Appointing a Liquidator

Where a company has already been served with an application for liquidation by the Court, restrictions apply regarding the appointment of a liquidator by shareholders or directors.

In certain circumstances, an appointment must occur within prescribed timeframes or it may be invalid unless the creditor who filed the application provides consent.

These provisions exist to protect the independence and integrity of the liquidation process.

What Happens to Creditors in a Liquidation?

Creditors are generally paid according to the priorities established under New Zealand insolvency legislation.

The outcome depends on factors including whether a creditor has security, the assets available and the claims against the company.

Secured Creditors

Secured creditors have security over specific company assets or may hold a General Security Agreement (GSA) over company assets.

Their rights depend on the nature and registration of their security interests.

Liquidator Expenses

The costs and expenses associated with managing the liquidation are generally paid from available company assets before distributions are made to creditors.

This can include costs such as:

• Liquidator fees and expenses.
• Costs associated with preserving assets.
• Necessary expenses incurred during the liquidation process.

Employees

Certain employee claims, including eligible wages and holiday pay, receive preferential treatment up to statutory limits.

Some exclusions apply, including certain claims relating to directors and related parties.

Inland Revenue Department

Certain tax obligations, including PAYE and GST claims, receive priority over unsecured creditors where legislation provides.

Unsecured Creditors

After secured claims, liquidation costs and preferential claims have been addressed, any remaining funds may be distributed among unsecured creditors.

Shareholders

Shareholders are paid last and only receive a distribution if all other claims have been paid in full. In most insolvent liquidations, this does not occur.

Liquidation Reporting Requirements

Liquidators are required to provide reports to creditors and shareholders throughout the liquidation process.

The initial report provides information on the company’s position, including an estimated statement of affairs.

Further reports are generally provided at regular intervals until the liquidation is completed.

The quality and availability of company records can significantly affect the efficiency of this process.

Creditor Compromise – An Alternative to Liquidation

A creditor compromise can provide an alternative pathway for companies experiencing financial difficulty.

A compromise is a formal arrangement between a company and its creditors to restructure outstanding debts. It may allow a business to continue operating while addressing financial obligations.

The process generally involves:

Proposal

A proposal is prepared outlining the terms of the compromise, reasons for the proposal and the expected outcomes for creditors.

Creditor Meeting

Creditors are provided with information about the proposal and have the opportunity to consider and vote on it.

Approval

A compromise requires approval in accordance with the requirements of the Companies Act 1993.

Once approved, the compromise becomes binding on the relevant creditors.

Benefits

A creditor compromise may:

• Allow a viable business to continue trading.
• Provide creditors with a better outcome than immediate liquidation.
• Create a structured pathway to resolve financial difficulties.
• Reduce the need for formal liquidation proceedings.

Understanding Your Options

Every business situation is different. The best solution depends on the company’s financial position, the interests of stakeholders and the available options.

Early professional advice can help directors and stakeholders understand their position, protect value and make informed decisions.

At Pryde Accounting & Advisory Limited, we provide confidential advice and specialist insolvency services to help you navigate difficult situations.

Beyond the Numbers. Ahead of the Curve.

We help business owners through every stage of the business lifecycle.

Financial pressure is one of the most challenging situations a business owner can face. When a company begins experiencing cash flow difficulties, directors need to understand their responsibilities and take proactive steps to assess the company’s position.

Continuing to trade while insolvent, or taking on new obligations when there is no reasonable prospect of meeting them, can expose directors to personal liability.

The key message for directors is simple: financial difficulty does not mean a business must immediately close, but it does mean directors must act carefully, responsibly and proactively.

What Is Reckless Trading?

Under section 135 of the Companies Act 1993, directors must not allow a company to operate in a way that creates a substantial risk of serious loss to creditors.

The focus is not simply whether a company is experiencing difficulties. Businesses regularly face challenges, changing markets and periods of uncertainty.

The question is whether directors are taking unreasonable risks that could significantly worsen the position of creditors.

Legitimate business decisions involve calculated risks. However, continuing to trade where:

• The company is insolvent or close to insolvency.
• There is no reasonable prospect of recovery.
• Creditors are likely to suffer further losses.

may create a risk of personal liability for directors.

Directors Must Continually Assess the Company’s Position

When a company experiences financial pressure, directors are expected to make ongoing and informed assessments of the company’s position.

This includes considering:

• Current cash flow.
• Future income and trading prospects.
• Ability to pay creditors.
• Available funding options.
• The likelihood of recovery.
• The impact on creditors.

Where circumstances indicate increasing financial difficulty, directors should respond promptly and ensure the position of creditors does not continue to deteriorate.

In these situations, the interests of creditors become increasingly important.

Directors Must Consider New Obligations Carefully

Section 136 of the Companies Act 1993 also provides that directors must not agree to the company taking on an obligation unless they reasonably believe the company will be able to meet that obligation.

Examples may include:

• Entering into new contracts.
• Taking on additional debt.
• Continuing to purchase goods or services on credit.

Directors need to have a reasonable basis for believing the company can meet these commitments.

The Importance of Documenting Decisions

When a company is facing financial difficulty, directors should carefully document:

• The company’s financial position.
• The issues being considered.
• Advice received.
• Options reviewed.
• Proposed actions and recovery plans.

A plan to continue trading should be realistic and supported by evidence. Decisions are often reviewed with the benefit of hindsight, so maintaining clear records of the decision-making process is important.

Understanding Solvency

For a company to be considered solvent, it generally needs to satisfy two key tests.

Trading Solvency (Liquidity)

The company must be able to pay its debts as they fall due in the normal course of business.

This considers whether the company has sufficient cash flow to meet its ongoing obligations.

Balance Sheet Solvency

The value of the company’s assets must exceed the value of its liabilities, including relevant contingent liabilities.

A company may have valuable assets but still experience cash flow difficulties. Equally, a company may have positive cash flow while carrying significant balance sheet issues.

Both aspects need to be considered.

Seek Advice Early

When a company is experiencing financial difficulty, early advice can provide directors with a clearer understanding of their position and available options.

A licensed insolvency practitioner can assist with:

• Assessing financial circumstances.
• Reviewing restructuring options.
• Developing recovery strategies.
• Understanding director obligations.
• Considering formal insolvency processes where appropriate.

The earlier challenges are identified, the more opportunity there may be to protect value and achieve the best possible outcome.

About the Author

Hamish Pryde BBS, CA (PP) is a Chartered Accountant, Public Practitioner and Licensed Insolvency Practitioner (IP47). He advises business owners, directors and stakeholders on accounting, business advisory, restructuring and insolvency matters.

Hamish Pryde BBS, CA (PP)
Chartered Accountant | Licensed Insolvency Practitioner (IP47)
Principal – Pryde Accounting & Advisory Limited

A Director’s Duty to Creditors When Insolvency Is Approaching

When a company begins experiencing financial difficulty, directors face some of the most challenging decisions they will make in business.

A director’s focus normally sits with promoting the best interests of the company. However, when insolvency becomes a real possibility, directors must also consider the interests of creditors and take steps to ensure their decisions do not worsen the position of those creditors.

This can be a complex judgement call.

A company may be experiencing significant cash flow pressure, yet there may still be a realistic pathway to recovery. A temporary financial setback, new funding opportunity, restructure or improvement in trading conditions may mean continuing to trade is in the best interests of creditors.

Alternatively, continuing to trade without a reasonable prospect of recovery may increase creditor losses.

The key question is whether the directors’ decisions are reasonable, prudent and justifiable based on the information available at the time.

What Should Directors Consider When Insolvency Is a Possibility?

Directors should actively assess the company’s financial position and consider:

Ensure Financial Information Is Accurate and Current

Directors need reliable information to make informed decisions. This includes understanding:

• Current cash flow.
• Outstanding creditor obligations.
• Future income expectations.
• Available funding options.
• The company’s overall financial position.

Hold Regular Board Meetings and Document Decisions

Directors should ensure important discussions, decisions and reasons are properly recorded.

Good documentation demonstrates that directors have actively considered the company’s position and acted responsibly.

Obtain Professional Advice

Independent advice can provide valuable perspective and help directors understand:

• The company’s financial position.
• Available restructuring options.
• Potential risks.
• Director obligations.

Consider Whether Continuing to Trade Is Appropriate

Directors should regularly assess whether there is a realistic prospect of recovery or whether alternative options should be considered.

Explore Funding and Restructuring Options

Depending on the circumstances, options may include:

• Additional funding.
• Negotiated creditor arrangements.
• Restructuring operations.
• Selling parts of the business.
• A formal insolvency process.

Manage Cash Flow Carefully

Cash flow decisions become increasingly important when a company is under pressure.

Directors should carefully consider new commitments and ensure decisions are based on realistic expectations.

Early Advice Creates More Options

One of the biggest misconceptions about insolvency advice is that it is only required when a business has reached the point of failure.

In reality, early advice can often provide more opportunities.

Depending on the circumstances, options may include:

• Restructuring the business.
• Negotiating with creditors.
• Improving cash flow management.
• Selling the business or parts of the business.
• Developing a recovery plan.
• Considering formal insolvency options.

The earlier challenges are identified, the greater the opportunity to protect value and achieve the best possible outcome for stakeholders.

A Practical Approach to Insolvency Advice

At Pryde Accounting & Advisory Limited, we understand that financial difficulty is a challenging time for directors, employees, creditors and families.

Our role is not simply to manage formal insolvency appointments. We also provide practical advice to help directors understand their position, assess options and make informed decisions.

Hamish Pryde is a Chartered Accountant, Public Practitioner and Licensed Insolvency Practitioner, with experience advising businesses through financial challenges, restructuring and recovery.

Seeking advice early allows more options to be considered and gives stakeholders the best chance of achieving a positive outcome.

About the Author

Hamish Pryde BBS, CA (PP) is a Chartered Accountant, Public Practitioner and Licensed Insolvency Practitioner (IP47). He advises business owners, directors and stakeholders on accounting, business advisory, restructuring and insolvency matters.

Hamish Pryde BBS, CA (PP)
Chartered Accountant | Licensed Insolvency Practitioner (IP47)
Principal – Pryde Accounting & Advisory Limited

In the very early 1900’s, an Italian economist by the name of Vilfredo Pareto created a mathematical formula describing the unequal distribution of wealth he observed and measured in his country: Pareto observed that roughly twenty percent of the people controlled or owned eighty percent of the wealth. The assumption is that most of the results in any situation are determined by a small number of causes. A management thinker Joseph Juran developed this philosophy further in the 1940’s, and suggested that this can be applied in business.

The vital few and the trivial many

The “80 / 20 Rule” means that in anything (workers, customers, etc) a few (20%) are vital, and many (80%) are considered trivial. In Pareto’s case, he found that roughly 20% of the people in his country dominated with 80% of the wealth. It has been suggested that you can apply the “80 / 20 Rule” to almost anything.

There are business examples that 20% of customers are responsible for 80% of the business income. Others like 80% of your stock come from 20% of your suppliers. Then why is it that 80% of your staff problems come from 20% of your staff? The formula appears to work in both directions.

How Pareto’s Principle can help us

The value of the Pareto principle in management is in reminding us to stay focused on the “20% that matters”. Of all the tasks performed throughout the day, one could say (based on Pareto’s principle) that only 20% really matter. Those tasks in the 20% very likely will produce 80% of our results. Therefore, it is critical that we identify and focus on those important things.

When the fire-fighting “crisis of the day” begins to eat up precious time, remind yourself of the critical 20% you need to focus on. If anything in the list of activities and action items has to be left undone, be sure it is not listed in that critical 20%.

Do not ignore the 80%

Thinking about the 80%: If 20% of your employees are likely to produce 80% of your results, you should focus your limited time in management of only that 20% – the so-called superstars. However, this proposed implementation of Pareto’s principle to management is potentially flawed because it overlooks the fact that 80% of your time should be spent doing what is important, or most likely to deliver the greatest return. By helping your “average” salespeople become better; you are more likely to reap greater results than by dedicating the same management effort to helping the fewer “superstar” salespeople become terrific. In this case, the sheer numbers work against you spending time only helping manage and improve the few great workers. Thus, it is wise to evaluate various management situations and apply the Pareto principle appropriately ~ and wisely.

Work Smart

It is not only important to do things right, but also to ensure you are doing the right things. Pareto’s principle should serve as a reminder to us to stay focused on investing 80% of our time and energy on the 20% of work that is really important. It is not just important to “work hard” and “work smart”, but also to work smart on the right things.