Company Directors – Personal liability for tax obligations
By Jack Newton, Lawyer, MST Lawyers
The Australian Taxation Office (ATO) is regularly and systematically using Director Penalty Notices (DPNs) to ensure companies meet their tax obligations. Directors must ensure that the company has met and continues to meet its tax obligations or face personal liability to the ATO.
Director Penalty Notice regime
One of the core requirements for any company director is to cause the company to comply with all of its obligations. One of the most important obligations (in respect of possible consequences for the director personally), is the lodgement of returns and payment of tax.
The ATO “encourages” directors to comply with their obligation to cause the company to lodge and pay its Pay As You Go (PAYG) withholding tax and the Superannuation Guarantee Charge (SGC) returns through the use of DPNs. In circumstances where a company has either not reported the unpaid PAYG or SGC, or the company has simply reported it but not paid it, the ATO will likely issue each director with a DPN.
The terms of the DPN will depend on whether the company has reported or not reported the unpaid tax. If the company has reported it, the company will have a choice to, within 21 days, pay the tax, put the company into administration or put the company into liquidation. If the company has not reported it, the company will only be permitted to pay the tax (the administration and liquidation options are not available).
In the event the company does not comply with the DPN, the director will be personally liable to pay a penalty to the ATO in an amount equivalent to the sum of the unpaid tax.
Defences to DPNs for directors
A director has two defences to a DPN court proceeding:
- Because of illness or other “good reason” it would be unreasonable to expect the director to take part in (and the director did not take part in) the management of the company; or
- The director took all reasonable steps to cause the company to comply with its obligations (or cause the company to enter into administration or liquidation) and there were no reasonable steps that could have been taken to ensure either of those things happened.
The director has the onus to persuade the Court to accept one of the defences.
A DPN in action – Holton
In a recent case in the County Court, Deputy Commissioner of Taxation v David John Holton  VCC516 (17 May 2016) the ATO successfully obtained orders for $264,000 from a single director (Mr Holton). Of the three company directors, two had been declared bankrupt which meant the ATO could only pursue Mr Holton for the unpaid PAYG amounts.
As is common in SME companies, the directors split themselves across various roles, in that one director (Mr Benjamin) was the “financial” director and Mr Holton was the “operations” director. Mr Holton also engaged a national accounting firm to assist Mr Benjamin with the accounting role.
The accounting firm began to raise concerns in respect of debts to the ATO. Two years of income tax returns had not been lodged and seven business activity statements were also outstanding. After communications between the three directors broke down, the liabilities to the ATO continued to rise, such that by May 2013 there was over $700,000 owing to the ATO (though only $264,000 in PAYG tax).
Mr Holton argued that he held a role with another business and Mr Benjamin was responsible for the financial matters. That argument continued that because Mr Holton had engaged a national accounting firm and a reputable firm of solicitors, his liability should be excused as he had a “good reason”.
The Court very strongly found against this argument. The duty of all company directors is to participate in the management of the company – it is insufficient for roles to be divided such that directors do not participate in certain aspects of the business.
In respect of the reasonable steps defence, Mr Holton made similar arguments which were again rejected by the Court. Mr Holton further argued that he had called a directors meeting to vote to put the company into administration or liquidation. This was also found to be insufficient by the Court, which effectively held that he should have sought court orders for the administration or liquidation of the company (which was found to be a “reasonable step” that should have been taken).
Key lessons to be learned
Some important points to note include:
- Service of a DPN is effected by the ATO simply by posting the letter into a letterbox – there is no requirement that the director ever receive the notice. Non-receipt is not sufficient.
- In Holton, the Court conceded that Mr Holton was less blameworthy than Mr Benjamin, though the court referred to the “considerable and widespread” deduction of employee wages without remitting the deductions to the ATO.
- The delegation of “financial matters” to one or more directors will be seen by the ATO and by the courts as entirely insufficient.
- A director who resigns will remain personally liable for unpaid PAYG or SGC tax even after the resignation.
- A new director will automatically and immediately become liable for all past unpaid PAYG or SGC tax upon joining the company as a director. This means pre-entry due diligence on the company must be a mandatory consideration for incoming directors.