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Australian Lawyers and Consultants

Tax Action Against Directors

June 2003

Depending on the type of tax and a variety of other factors, the Federal Commissioner of Taxation now has a range of powers and different ways to extract payment for unpaid tax liabilities of a company from any of its directors.

Furthermore, a director in some such circumstances can face criminal conviction and the prospect of a jail sentence.

The High Court in Lean v Brady (1937) and the Federal Court in Reynolds case (1984) have held that the Tax Commissioner’s powers in Section 252 of the ITAA 1936 do NOT empower the Commissioner to recover an unpaid company (income) tax liability from the company’s statutory "public officer".

However, sec. 8Y of the Tax Administration Act and sec. 21B of the Crimes Act can impose such a liability on a director arising from a tax offence of the director. Chapter 11 of the "ATO Prosecution Policy" clarifies the criteria for when the Tax Commissioner is more likely to invoke these sections, especially where there has been deliberate hindrance of the ATO, the engineering of an insolvency or a shuffle of company assets to an associated party in order to defeat the operation of tax laws.

One of the biggest ‘sticks’ the Commissioner has against directors is the use of a "Director Penalty Notice", under Division 9 of the ITAA 1936 (ss. 222ANA to 222AQD). However, the division does not apply to company income tax but applies for various other liabilities of a company such as reportable payments (inc GST), PAYG (i.e. group tax), amounts payable regarding attempted alienation of personal services income, company liability to pay a tax estimate (Div 8), tax on non-cash benefits, and failure to remit withholding tax and other taxes of a similar ilk.

According to section 222AOE, before the Commissioner can seek recovery of the outstanding tax from a director, a "penalty notice" must be given to the director.

This Director Penalty Notice ("DPN") must set out details of the unpaid amount and the various courses open to the director. There are a variety of possible legal avenues for the director, such as:

1. challenging a DPN for invalidity or technical defects;
2. appointing an administrator to run the company and bring the action to a halt; or
3. providing a thorough explanation that non-compliance of the company could not have been the fault of a director.

The recent case of DFC of T v Saunig 2002 NSWCA 390 is an example of a case showing how imperative it is for a director to understand the choices and courses of action that are available. In this case, the Full NSW Appeal Court found the concept of "reasonable steps" was applied with respect to what a reasonable director would have known and the enquiries that a reasonable director would have undertaken. Yet, the reasonableness of the steps required to be taken in order to have a DPN remitted is an objective test and need not take the knowledge held by the specific director into consideration.

For further information, contact Sam Recht at BALDWINS, Australian Lawyers & Consultants.

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