Taxation Law - Consequences of Directors Penalty Notices

Where there has been a failure to abide by Section 222AOE by the end of the 14 day period the ATO is at liberty to recover the amount of outstanding tax from each and every director on a joint and several basis. The section makes it clear that the debt arises at the end of the 14 day period after which notice is given. Although defenses are available they are more in point to the exception rather than to the rule. Defenses are available where:

1. directors establish that because of illness or for some other good reason they did not take part in the management of the company at the time;
2. they took all reasonable steps to ensure that the directors complied with their obligation as specified above or that there no such steps that the director could reasonably have taken in the circumstances.

“Reasonable” means reasonable having regard to:

1. when and for how long, the person was a director and took part in the management of the company; and
2. all other relevant circumstances.

It should be noted that new directors are just as liable as old directors with respect to tax debts irrespective on whose watch they arose.

Where a director receives a Directors Penalty Notice they should react immediately as 14 days is an extremely short period of time within which to respond. The risk is that if the company is insolvent then the director is personally at risk allowing the ATO to recover the amount of tax from each and every director as if it were a personal debt. To reiterate the liability affects not only current directors but past directors where they were directors at the time at which the debt arose. The message is in the gesture. If you are considering taking on a directorship then it behooves anyone contemplating such action to check whether or not there is any amount outstanding or unremitted tax. As French DCJ said in Fitzgerald v FCT, the leading case in this area “it is the responsibility of a new director at or before taking up his appointment to make enquiries of the relevant officers of the company as to whether there were any monies owing by the company to the Commissioner.” The situation may be somewhat different with nominee directors but this would need to be assessed given each the particular circumstances of each and every case. 

Repayment Agreements – Unfair Preferences

Where repayment agreements are entered into by the company the Tax Office will always look at its capacity to repay based upon its supporting financials including its P&L and Balance Sheet. It may seek security of payment either from the company or its directors should there be a failure to repay. Don’t forget there are three aspects to the matter. The amount of unpaid tax, the penalty and the ability of the Tax Office to prosecute both the company including an officer or director of it who was concerned in or took part in the management of the corporation when the act or omission took place apart from the imposition of GIC.

Where a repayment agreement has been entered into and the company subsequently fails to meet its obligations any liquidator appointed will scrutinize payments to creditors including the ATO to ascertain whether there have been any unfair preferences under the Corporations Act. If the ATO has received an unfair preference then the claw-back provisions will apply and  the ATO is entitled to seek reimbursement from the directors unless they can establish one of the statutory defenses referred to previously. Installment arrangements, although a quick fix should only be relied upon by the directors where they believe the company has a realistic capacity to pay. In all these circumstances immediate action is required based on competent, professional advice to ensure that the most appropriate option is taken to ensure the best possible outcome in the circumstances. Delay is death. For competent, professional advice and representation contact LAC Lawyers on (02) 9904 6800.