The Australian Taxation Office (“ATO”) for some time now has had the ability to issue a Director Penalty Notice (“DPN”) pursuant to Section 222AOE of the Income Tax Assessment Act 1936. The Tax Laws Amendment (Transfer of Provisions) Act 2010 has come into law, effective from 1 July 2010. That Act will amend the existing tax insolvency laws. Whilst the changes are limited in the contex t of what was originally tabled as a possibility, they will have significant impact on company directors.

The DPN sets out a director’s personal liability to pay a penalty equal to the amount of the outstanding PAYG Withholding liabilities of the company specified in the notice should they fail to act in accordance with the notice, previously within a fourteen day period which has now been extended to 21 days. Along with such a penalty, a director may well remain liable for the outstanding amount.

It should be noted that a DPN only applies to PAYG Withholding liabilities outstanding for the period of a director’s appointment.

The theory behind the issue of such notices is to guarantee a prompt response by the directors as it requires almost immediate action to be taken in order to avoid becoming personally liable for the debts set out in the notice.

The four available courses of action formerly identified in the notice are set out below:

1. Pay the debt in full
   
   
2. Enter into an agreement to repay the debt under Section 222ALA of the Income Tax Assessment Act 1936
   
   
3. Appoint a Voluntary Administratorto the company; or
   
   
4. Appoint a Voluntary Liquidator to the company and have it wound up.
   

Whilst these choices available may seem relatively straight forward they can be more limited than they first appear, especially due to recent changes.

Pay the Debt in Full
The nature of such a notice generally means that a company does not have sufficient funds available to pay out the outstanding amount in full. If the client has the ability to pay the amount then this may be an option available.

It should be noted that if payments are clawed back by a Liquidator then the directors may be personally liable to the ATO to the extent of the amount clawed back.

Enter into a payment arrangement under Section 222ALA of the Income Tax Assessment Act 1936
This option usually appears to clients to be the most appealing of the four available options.

Under the old regime, if a director has received a DPN, he could potentially avoid personal liability for the tax debt by entering into an instalment payment arrangement with the ATO. It allowed further time for the directors to assess the company’s situation and bring its affairs into order before deciding upon its future.

The new provisions have amended the remission provisions so that, entering into an instalment agreement will not remit the director’s obligations under a new DPN. The only thing an instalment agreement will do is to preclude the Commissioner from commencing proceedings to enforce the obligation of the director’s penalty notice for the period while instalment payments are made, in line with the agreement.

Therefore it follows that by opting for this option a director taking on personal liability in respect of PAYG Withholdings due from the company.

Appoint a Voluntary Administrator to the company
The appointment of a Voluntary Administrator may now become the most palatable option for the directors of the company in the circumstances of receiving a DPN. This option allows the director’s to avoid personal liability for the amounts set out in the DPN, without the company necessarily being wound up as there is the option for a Deed of Company Arrangement to be proposed and if accepted the control of the company returned to the director.

We are happy to discuss this option with you and your client(s) should the need arise. Each particular circumstance is unique and a number of options may be available to directors once entering into a formal appointment.

Appoint a Voluntary Liquidator to the company and have it wound up.
The appointment of a Voluntary Liquidator is the other option that will remit the director’s obligations under a DPN. The draw back of this option is that control of the company, its asset and liabilities, affairs and dealings will be taken over by the Liquidator and the operations of the company sold off or wound down. In some circumstances this option may be advisable due to the financial position of the company and its directors.

We are happy to discuss this option with you and your client(s) should the need arise. Each particular circumstance is unique and a number of options may be available to directors once entering into a formal appointment.

Other changes of note

• the period of notice that the Commissioner is required to give directors before taking recovery proceedings has been extended from 14 to 21 days.
  
  
• the new provisions amend the DPN regime to confirm that a DPN clearly takes effect from the date when it is posted, not when it is received by the director. This states the law as found in DCT v Meredith.
  
  
• the defence of “illness or other good reason” has been amended to make it more difficult for a director to rely on. In addition to establishing the director was ill or for some other good reason did not participate in the management of the company at the time the relevant tax liability fell due, the director must now also establish that it would have been unreasonable to expect him or her to have taken part in the management of the company at that time. This fixes drafting problems that existed within the current provisions.
  
  
• It is also now clear that the court has no power under section 1318 of the Corporations Act to grant relief to a director from their obligations in respect of a DPN. This confirms the existing law in DCT v Dick.
  
  
• A further point of note is that the ATO does not have the discretion to remit a DPN irrespective of the circumstances surrounding the matter.
  

Whilst the above are only limited in comparison to what had been proposed they are significant enough to have a major impact on the considerations a director should take into account when a DPN is received and potentially could change the way that the ATO is viewed as a creditor.


Graeme Beattie, Sydney West
gbeattie@moorestephens.com.au


Contact

Graeme Beattie
T +61 2 9890 1111
gbeattie@moorestephens.com.au

www.moorestephens.com.au