NEWSLETTER | AUGUST 2016

Director Penalty Notices (“DPNs”) – Let the Director Beware

Two recent court decisions have reiterated the responsibilities of directors for payment of withheld taxes (and superannuation payments) and the importance of paying heed to the protections available against personal liability contained within relevant taxation legislation.

Before looking at the decisions we should recap the requirements under tax legislation. A company is required to withhold from employees PAYG amounts and remit them to the ATO. Directors must cause the company to comply with its obligations and they continue to be under this obligation until either the company complies, administrators are appointed or the company is wound up. Tax legislation imposes a personal obligation on directors equal to the company’s obligation. This obligation is imposed at the same time as the remitted tax is to be paid to the tax office. The ATO however can only recover from directors in certain circumstances.

The first of these circumstances is where the company does not lodge its business activity statements or instalment activity statements with the ATO within the required time. Once the statements have not been lodged within three (3) months of the due date the Commissioner may issue the director with a DPN for the outstanding obligation. In these circumstances the directors’ obligation can only be waived by the company paying the outstanding amount otherwise it will fall to the director to meet the obligations. These DPNs are generally referred to as the “lockdown” DPNs.

The second circumstance is where the company makes its tax lodgements within three (3) months of the due date but does not make payment of its obligations. In this case the Commissioner may issue a DPN against the directors, however, the directors can avoid liability if, within 21 days of receiving a DPN;

  1. the amount the subject of the notice is remitted to the ATO by either the director or the company, or
  2. the company enters into a payment arrangement with the Commissioner (this is a formal document not merely an exchange of letters), or
  3. the company either appoints a voluntary administrator or is wound up.

In the two decisions Deputy Commissioner of Taxation v Panayi and Deputy Commissioner of Taxation v Fitzgerald both of the defendants were attempting to avoid liability imposed on them pursuant to issued DPNs.

In Panayi the defendant argued that he should not be liable for the penalty imposed for unremitted tax for the period 1 May 2011 to 30 September 2011 because he was unable to take part in the management of the Company because of illness or other good reason and/or he was not a director and/or the monies should be deemed to be remitted. He failed on all grounds.

Under tax legislation a director is able to avoid liability to a penalty if because of illness or for some other good reason, it would have been unreasonable to expect the director to take part, and the director did not take part, in the management of the company at the relevant time. In this case the defendant advised that he could not take part in the management of the business because he suffered from high blood pressure since 2006, had a heart attack in May 2014 and was given a pacemaker and suffered from poor eyesight due to cataracts. This claim was supported by a medical report from a general practitioner and no other evidence was given. The Court did not accept this evidence and noted that there was no corroborating evidence such as sick leave from the company and noted that the defendant continued working full-time and held a full drivers licence until shortly before the court hearing.

The director claimed that despite him appearing on the company search as a director he did not know he was a director and he should not be held as such. The main reason it appears that the defendant ran this argument was that there was no evidence of a signed consent from him to act as a director. The Court took into account tax lodgements signed by the defendant as a director, letters written to third parties signed as a director, agreements entered into with third parties identifying the defendant as a director and the fact that the defendant was the sole director who appointed a liquidator to the company. The Court, not unsurprisingly, concluded that the defendant was in fact a director at all relevant times.

The defendant also claimed that the amounts should be deemed to be remitted as the defendant had placed the company into liquidation within 21 days of receiving the DPN. As stated above the unremitted tax related to the period 1 May 2011 to 30 September 2011. The last due date for remittal of any of the amounts withheld was 25 November 2011 and all tax lodgements in respect of the amounts withheld were lodged on either 14 February 2012 or 8 March 2012. Clearly the tax lodgements had been made later than three (3) months from the due date and were subject to the lockdown provisions. However the defendant argued that the lockdown provisions did not come into force until 27 June 2012 and as such it was unfair of the Commissioner to impose the liability on him. The Court following precedent determined that the lockdown provisions merely remove the availability of remission and have no impact on a pre-existing liability and therefore regardless of when the liability was incurred if the corresponding tax lodgements are not made within three months of the due date the imposed liability can only be remitted by payment and not by appointment of a voluntary administrator or placing the company into liquidation.

In Fitzgerald the defendant tried to avoid liability for amounts withheld between 1 August 2013 and 31 August 2014 by arguing that he had not received the DPN and therefore had been denied the ability to take advantage of the remission provisions. The defendant lost this argument for two reasons.

The first reason related to the address of the defendant in the company’s records registered with ASIC. The ASIC records recorded the director living at 113-115 of a certain street. In fact the defendant owned 115 and his wife owned 113. The defendant and his wife lived at 115 and a third party business operated from 113. On 20 March 2015 the Commissioner issued a DPN by post to the director at 113 – 115. The defendant deposed that he did not receive the DPN until 7 May 2015 when it was handed to him by the proprietor of the business operating from 113. The court found that as the DPN had been sent to the address as listed in the ASIC register that the Commissioner had complied with his obligations and the DPN notice was deemed to have been given to the defendant on 20 March 2015.

The Court also noted that even if this was not the case, the director had not been denied the ability to take advantage of the remission provisions by placing the company into voluntary administration or winding it up as the last due date for the penalties imposed was 22 September 2014 and as the tax lodgements had not been made by 22 December 2014 the director would have been subject to the lockdown provisions in any event.

These two cases show the importance of ensuring that tax lodgements are always made within three months of the due date and that the director’s details on the ASIC register are kept up to date and accurate to ensure that, should a company not be able to meet its withholding tax obligations, all of the remission provisions are open to its directors.

These two cases show the importance of ensuring that tax lodgements are always made within three months of the due date and that the director’s details on the ASIC register are kept up to date and accurate to ensure that, should a company not be able to meet its withholding tax obligations, all of the remission provisions are open to its directors.

Should you have clients that are finding it difficult to or not meeting their tax obligations, do not hesitate to contact either Anthony, Ron or Cameron for an obligation free discussion of your clients’ circumstances and available remedies.