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Blazey, Patricia --- "Non Payment Of Pay As You Go Withholding Tax And The Implications For Company Directors" [2005] JlATaxTA 29; (2005) 1(3) Journal of The Australasian Tax Teachers Association 70


NON PAYMENT OF PAY AS YOU GO WITHHOLDING TAX AND THE IMPLICATIONS FOR COMPANY DIRECTORS

PATRICIA BLAZEY[1]

Patricia Blazey is a Senior Lecturer in the Division of Law in the Department of Business Law at Macquarie University, Sydney.

I INTRODUCTION

On 1 July 2000, the Australian Federal Government replaced the Pay As You Earn system (PAYE) and various other tax systems with the Pay As You Go (PAYG) system. The PAYG legislation contains the PAYG withholding system and the PAYG instalment system. The PAYG withholding system is comprised of a single set of rules that applies to all withholding tax payments.

This article examines a number of recent Australian court decisions in which the Commissioner of Taxation (Commissioner) has taken legal action against directors in their personal capacity for non-payment of PAYG withholding tax. The case law demonstrates that the Courts narrowly interpret the relevant statutory defences with directors being held personally liable for their company’s debts.

This article addresses the PAYG withholding tax providing an overview of the obligations placed on company directors to remit PAYG withholding tax on time. In sections II and III it provides and overview of the legislative provisions. Sections IV and V examine the penalty provisions which can be invoked by the Australian Taxation Office (ATO) when directors fail to comply with their obligations and also provides an overview of the approach taken by the courts when the ATO institutes proceedings against company directors who have breached the withholding tax provisions. Section VI sets out the conclusions.

II BACKGROUND TO THE STATUTORY SCHEME FOR COMPANY DIRECTORS

Section 222ANA (1) of the Income Tax Assessment Act 1936 (ITAA36), set out below, provides that the purpose of Division 9 of the ITAA36 is to ensure that directors of companies comply with their withholding tax obligations:

222ANA Object and outline

(1)The purpose of this Division is to ensure that a company either meets its obligations under Division 1AAA, 3B, 4 or 8 of this Act, or under Subdivision 16B in Schedule 1 to the Taxation Administration Act 1953, or goes promptly into voluntary administration under Part 5.3A of the Corporations Act 2001 or into liquidation.

Failure to meet these requirements results in the imposition of penalties as set out in Section 222ANA (2):

222ANA (2) The Division imposes a duty on the directors to cause the company to do so. The duty is enforced by penalties. However, a penalty can be recovered only if the Commissioner gives written notice to the person concerned. The penalty is automatically remitted if the company meets its obligations, or goes into voluntary administration or liquidation, within 14 days after the notice is given.

If withholding tax is not remitted the ATO will issue a penalty notice to a person under the provisions of s 222AOE. If at the end of 14 days after service of the notice the withholding tax is not remitted to the ATO, the Commissioner is entitled to issue proceedings against the person:

S 222AOE

The Commissioner is not entitled to recover from a person a penalty payable under this Subdivision until the end of 14 days after the Commissioner gives to the person a notice that:

(a)sets out details of the unpaid amount of the liability referred to in subsection 222AOC(1), (1A) or (2) (whichever relates to the penalty); and
(b)states that the person is liable to pay to the Commissioner, by way of penalty, an amount equal to that unpaid amount, but that the penalty will be remitted if, at the end of 14 days after the notice is given:
(i) the liability has been discharged; or
(ii) an agreement relating to the liability is in force under section 222ALA; or
(iii) the company is under administration within the meaning of the
Corporations Act 2001 ; or
(iv) the company is being wound up.

The penalty notice gives a person four alternative courses of action with which to comply within 14 days of service:

1.Discharge the liability in full or
2.Make an agreement to repay the debt to the (ATO) or
3.Take action so that the company is placed under administration
4.Take action so that the company is wound up

Section 222AOJ (2)-(4) provides defences for directors who are alleged to have breached their obligations:

(2) It is a defence if it is proved that, because of illness or for some other good reason, the person did not take part in the management of the company at any time when:

(a) the person was a director; and

(b) the directors were under the obligation to comply with subsection 222AOB (1) or 222AOBAA (1).

(3) It is also a defence if it is proved that:

(a) the person took all reasonable steps to ensure that the directors complied with subsection 222AOB (1), 222AOBAA (1) or 222AOBA (1) (whichever is relevant); or

(b) there were no such steps that the person could have taken.

(4) In subsection (3):

reasonable means reasonable having regard to:

(a) when, and for how long, the person was a director and took part in the management

of the company; and

(b) all other relevant circumstances.

Failure by directors to remit PAYG withholding tax on time results in the imposition of a penalty equal to the unpaid amount. Directors therefore need to be aware of, and ensure compliance with, the legislation or face being held personally liable.

An examination of the case law in this area reveals that the courts adopt a narrow approach to the interpretation of the defences with the result that directors are finding it increasingly difficult to raise a successful defence.

The attitude of the courts is similar to that taken when proceedings are commenced against directors under s 588G (3) of the Corporations Act 2001 (Cth) for insolvent trading. This section holds directors personally liable where a company incurs a debt and there are reasonable grounds for suspecting that the company is insolvent at that time. Below are listed a number of warning signs for directors that a company is likely to be trading whilst insolvent:

The unexplained resignations of co-directors;
The withdrawal of support by the company’s banker;
The lack of other available avenues for raising finance;
The inability to raise further equity capital;
Mounting creditors who are not being paid in accordance with trading terms and the commencement of legal proceedings by some;
Continuing liquidity problems including a mismatch in the timing of debt due to creditors and money owed by debtors;
Relatively large and continuing trading losses;
The issuing of post-dated cheques, some of which are dishonoured;
Placement of orders by suppliers on COD terms;
The inability of the company to issue accurate historical financial information or forecasts;
Overdue payroll and withholding tax[2]

Young J makes it clear in Manpac Industries Pty Ltd v Ceccattini[3] that courts require directors to demonstrate special circumstances before they can be protected:

‘The essence of the matter is that the law provides limited liability to people carrying on business using a corporate vehicle because it is to the community’s interest that people should venture and take commercial risks in their trade without the constant worry of being personally liable for any risk which happens to go wrong. However there is a limit to that protection and the limit is reached where directors have reasonable grounds to believe that the company is no longer solvent. When that point is reached, the field of limited liability to a degree evaporates unless the directors can demonstrate some special circumstances as to why they should still be protected.’[4]

The ITAA36 provisions are intended to achieve the same purpose as s 588G by imposing personal liability on the directors to ensure companies comply with their tax liabilities. It is crucial that before accepting directorships, people should be aware that the legislation in this area is potentially onerous and the courts are less than sympathetic when there has been a failure by a director to comply with these obligations.

Since the introduction of PAYG, the Deputy Commissioner of Taxation has brought numerous proceedings against directors who have not known or understood, or have ignored, their duties to remit withholding tax to the ATO. Even though there are statutory defences under s 222AOJ of the ITAA36, an examination of the case law demonstrates that the courts are reluctant to accept the wide variety of excuses that directors raise.

The ATO Prosecution Policy[5] refers to circumstances in which it will prosecute company officers i.e.:

1.Where the officers appear to be deliberately trying to defeat tax laws by way of a company vehicle
2.Where there have been previous prosecutions in relation to tax laws
3.Where the company does not have sufficient sources to repay the penalty
4.Where instalments of PAYG have not been remitted and it is unlikely that the company will be able to make those payments, and
5.In particular, where it appears that officers of the company are misappropriating company assets or attempting to become insolvent so as to defeat its creditors.

The ATO Prosecution Policy further states that a prosecution should only be brought against an officer if it seems unlikely that the officer could prove on the balance of probabilities they did not aid, abet, counsel or procure the act or omission giving rise to the offence and were not knowingly concerned in or a party to it.

III THE PAYG LEGISLATIVE SCHEME

The Commissioner has extensive powers to prosecute company officers. Section 8Y of the Tax Administration Act 1953 (Cth) (TAA53) deals with any omission or action by a corporation for non-compliance with a taxation law. It states:

where a corporation does or omits to do an act or thing the doing or omission of which constitutes a taxation offence, a person (by whatever name called and whether or not the person is an officer of the corporation) who is concerned in, or takes part in the management of the corporation shall be deemed to have committed the taxation offence and is punishable accordingly.

The section refers to directors and ‘an officer of the corporation’, which encompasses a director, director, secretary, receiver, manager, administrator, official manager or deputy official manager, liquidator appointed in a voluntary winding up, trustee or other person administering a compromise or agreement made between a corporation and other persons. S8Y (2) provides a defence with two elements:

(a) the person did not aid, abet, counsel or procure the act or omission of the corporation

and

(b) was not in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the act or omission of the corporation.

Careless and other similar behaviour, and even well intentioned but mistaken behaviour, can still be caught. Therefore failure to exercise due care and attention to matters involving tax liabilities may be caught by the ITAA36.[6]

In the case of the non remittance of withholding tax, the Commissioner commonly issues proceedings against directors in the civil courts under the penalty notice provisions found in Division 9 of Part V1 the ITAA36.

Schedule 1 Subdivision 16-B of the TAA53 sets out when and how withheld amounts are to be paid to the Commissioner. Withholders are divided in 3 categories; small, medium and large.[7] S 16-75 details when withheld amounts are due. A general interest charge applies to late payments.[8]

When a company fails to remit PAYG withholding tax, the Commissioner will issue a notice to the person under s 222AOE of the ITAA36. The section requires the Commissioner to give 14 days notice before proceeding to recover the penalty due. The notice must set out the details of the unpaid amount and requires a person to pay the Commissioner by way of penalty, an amount equal to the unpaid amount. At the end of the 14 days after service of the notice, the penalty is considered to be remitted in the following circumstances under s 222AOE (b):

1.The liability has been discharged; or
2.An agreement relating to the liability is in force under section 222ALA; or
3.The company is under administration within the meaning of the Corporations Act 2001; or
4.The company is being wound up.

Clearly if a company has problems in remitting its withholding tax it makes good sense to enter into a written agreement with the Commissioner under s 222ALA of the ITAA 36 to pay specified amounts on specified dates until the liability is discharged. Not taking advantage of this provision results in the activation of s 222ANA (2) which can result in a person being found personally liable to pay the outstanding withholding tax.

If a company makes the decision to wind up under s 222AOB (1)(d), a further danger can arise. A director must begin to undertake the procedure necessary to wind up a company within the 14-day period specified in the notice as failure to do so can result in the director being found personally liable.

In Scobie & Anor Ex Parte Deputy Commissioner of Taxation[9] Cooper J held that the obligation imposed on directors arises from the first deduction day and continues until compliance with s 222AOB (2). Therefore the period prior to receiving the notice is relevant. The directors here argued that the phrase ‘begins to be wound up’, meant the filing of an application for an order to wind up so that their actions in this regard were ‘reasonable’. Cooper J rejected this argument stating that a company only begins to be wound up when the Court issues an order, therefore the mere filing of an application does not comply with the notice requirements.

Should a matter proceed to litigation, s 222AOJ of the ITAA36 provides two main defences with the burden of proof resting on the defendant:

222AOJ (2) [Illness] It is a defence if it is proved that, because of illness or for some other good reason, the person did not take part in the management of the company at any time when:

(a)the person was a director; and
(b)the directors were under the obligation to comply with subsection 222AOB (1) or 222AOBAA (1).

222AOJ (3) [Reasonable steps]

(a) the person took all reasonable steps to ensure that the directors complied with subsection s222AOB (1), s222AOBAA (1) or 222AOBA (1) whichever is relevant); or

(b) there were no such steps that the person could have taken.

Under s222AOJ (4) ‘reasonable’ means reasonable having regard to:

...

(b) when and for how long the person was a director and took part in the management of the company; and

(c) all other relevant circumstances.

As the case law below demonstrates, these defences are difficult to make out.

IV CHALLENGING THE DEPUTY COMMISSIONER OF TAXATION’S NOTICE

A number of cases have been before the courts where directors have challenged the validity of the Deputy Commissioner of Taxation’s Notice (DCN) but such challengers have met with little or no success.

As stated above, before the Deputy Commissioner can initiate proceedings, a notice must be served on the ‘person’ under s 222AOE of the ITAA36. The first purpose of the DCN is to inform the recipient of the unpaid amount of the company’s liability under the remittance provisions, and the recipient’s liability of a penalty in the same amount. The second purpose is to inform the recipient of the alternative courses available to them.

In Deputy Commissioner of Taxation v Woodhams,[10] the High Court considered whether a DCN (or Penalty Notice) could be set aside because of its form. Mr Woodhams appealed to the High Court on the basis that the DCN was invalid under ss 222ANA, 222AOC, 222AOE, 222APE due to the absence of the naming of due dates for the remittance of withholding tax. It was argued this gave rise to uncertainty.

Gleeson CJ, McHugh, Gummow, Kirby and Callinan JJ held that the purpose of the DCN is to inform the directors of the unpaid amount of the company’s liability for withholding tax and to inform the recipient of the penalty. It was also to inform the recipient of the options available under s 222AOE (b) and to encourage payment of the outstanding debt. The section did not require the Deputy Commissioner to supply details of the facts relevant to the liability as this is a function of the pleadings and particulars. The High Court overruled an earlier decision of the NSW Supreme Court in DCT v Gruber[11] where it was held that:

A Director’s Penalty Notice can be a composite document and give notice of more than one outstanding remittance providing it states the amount of each obligation
If there is an error in the Penalty Notice it will be considered misleading and invalid.
A director’s Penalty Notice should be accurate in substance.

Mr Woodhams was successful in his appeal, the High Court holding that the Deputy Commissioner is not required to state the particular date on which the deduction made by a company are due.

In Harpas v Deputy Commissioner of Taxation[12] a director argued that the DCN was invalid as it referred to outstanding monies as a future rather than a present liability. Dunford J found this did not invalidate the notice because it was not a fundamental flaw as the legislative purpose was the giving of the notice. His Honour referred to the High Courts decision in Woodhams[13] and held that the purpose of the DCN was to inform the recipient of the unpaid amount and the options available to resolve the matter without incurring a penalty.

V EXAMINATION OF S 222ANA DEFENCES

A Short directorships

The case of Fitzgerald v Deputy Commissioner of Taxation[14] provides a warning to persons who accept directorships of short duration for whatever reason. In this case, Mr Fitzgerald was a friend of a person who was involved in the running of a company. He accepted the position of director without making inquiries as to the financial state of the company. The company had not remitted group tax to the ATO and proceedings were initiated against Mr Fitzgerald. He argued that he did not take part in the management of the company and was not aware of the tax debt until he resigned as a director. He said he had not been in a position to take reasonable steps to facilitate payment of the debt to the ATO. The Court dismissed his appeal and held that prior to a new director taking up an appointment he/she must make enquires of the relevant company officers as to whether there are outstanding tax debts. Only if a director could prove that false information had been provided to him/her could a successful defence being made out. French J stated that if a company lies to a prospective director that the company is solvent and it is later discovered this was not the case, the director might be in a position to make out a defence.

B De facto and Shadow Directors

In Deputy Commissioner of Taxation v Muriwai and Deputy Commissioner of Taxation v Solomon[15] three companies operated as a single business unit of which Mr Muriwai and Mr Solomon were directors. Mr Muriwai was appointed as a director of one of the subsidiaries on 23 June 2000 and remained in that position for only 5 days until 28 June 2000 when he resigned. The companies failed to remit PAYE deductions for April and May of that year. Dr Solomon was a director from September 1999 until March 2000 when he stepped down, but he was still involved after that time in the management of the company. He was re-appointed a director on 23 June 2000 and then resigned on 12 July 2000 though he continued to manage the companies until August 2000. The PAYE deductions for the period April May and June had not been remitted to the ATO. The Deputy Commissioner sought the outstanding payment for June from Mr Muriwai and the payments for April, May and June from Dr Solomon.

Dr Solomon argued that he was not responsible for the June payments as he had resigned and had not been re-appointed until 23 June. He argued that there were no reasonable steps he could have taken to ensure his fellow directors complied with section 222AOB. He stated he had been aware of the financial difficulties within the companies but only became aware of the outstanding tax liabilities after he joined the company. He argued that he had continually pressed the other directors for information regarding the financial state of the companies and was informed there would be an injection of cash into the business through the selling off of another entity which would result in the companies becoming solvent again. He also argued that he had little to do with the day to day activities of the company and was not a director of the company at the time of the failure to remit. During that time he underwent surgery for colon cancer and stated that on returning to work he was not permitted to see the accounting records of the company. Mr Muriwai argued that after he resigned from the company he was merely a senior officer.

The trial judge considered that there were no other steps Dr Solomon could have taken and took the view that he had inherited obligations in a company group which he believed to be financially sound. The trial judge accepted the defence raised under s 222AOJ (3) because it appeared to him that Dr Solomon had taken all reasonable steps to ensure compliance with the ITAA36. Mr Muriwai also succeeded in his defence. The Commissioner appealed the decision.

Gzell J, with whom both Handley and Scheller JJ agreed, found that Dr Solomon could have entered into a written agreement with the ATO under s 222ALA and did not do so. It was held that the term reasonable meant ‘having regard to when, and for how long, the person in question was a director and took part in the management of the company and all other relevant circumstances’.[16] Even though Dr Solomon only held the position of director for such a short time and thereafter acted as a de facto director, Gzell J held that Dr Solomon was still responsible for ensuring that the tax liabilities of the company were met. As far as Mr Muriwai was concerned Gzell rejected the argument that he was only a senior employee as he had acted as the managing director of the group of companies and carried out the same tasks after his resignation.

C S222AOJ (2) defence – the person ‘for some other good reason ... did not take part in the management of the company at any time’

The ‘I was only the wife and became a director to assist my husband’ defence is now difficult to raise because the courts take the view that when directors take on such a role they must ensure they are aware of the responsibilities involved.

In Deputy Commissioner of Taxation v Clark,[17] the Court made it clear it was unsympathetic to Mrs Clark who argued she took on the role of a director in order to assist her husband. The liquidator of Southern Cross Interiors sued the Deputy Commissioner to recover what he alleged were unfair preference payments. The ATO applied to the court for a declaration that Mr and Mrs Clark, as the directors of Southern Cross Interiors, were required to indemnify the ATO under section 588FGA(2) of the Corporations Act 2001 (Cth), which states:

588FGA (1) Each person who was a director of the company when the payment was made is liable to indemnify the Commissioner in respect of any loss or damage resulting from the order.

At first instance the Deputy Commissioner was successful in the claim against Mr Clark but failed against Mrs Clark. She relied on s 588FGB (5) of the Corporations Act 2001 (Cth) which provides that because of illness or some other good reason, the person did not take part in the management of the company. Mrs Clark stated that when one of the directors resigned her husband asked her to become a director because he believed that two directors were required to manage a company under the Corporations Act 2001 (Cth).

She told the court she had no business experience and was just a housewife and mother. She signed company documents, which were not explained to her. She stated she ‘would usually have a frying pan in one hand and be signing with the other’.

In her defence she relied on the judgment in Garcia v National Australia Bank.[18] Palmer J held that the principle enunciated in Garcia recognised that married people might take on responsibilities or liabilities that they would not normally have undertaken because of the existence of a special relationship between husband and wife. His Honour also made reference to the concept of ‘sexually transmitted debt’ in support of the wife’s argument and found in her favour.

The decision was overturned in the New South Wales Court of Appeal. Spigelman CJ in the leading judgment focused on the policy behind the amendments to the Corporations Act 2001 (Cth) which recognised that it is a fundamental structural feature of corporations legislation in Australia is that directors are expected to participate in the management of a company. His Honour held that every director is expected to actively participate in the management of a company and should be responsible for ensuring they understand what is involved in the role. Part of that requirement is to ensure that a company is solvent. The Court saw a risk in reinforcing gender stereotypes. In finding Mrs Clark liable, Spigelman CJ held that women who take on the role of a director cannot fall back on this type of defence because it is likely to undermine the confidence of potential creditors who deal with small companies in which women have increasingly become directors. The words ‘good reason’ must be read down so as not to conflict with the obligation of directors to participate in the management of a company.

This case can be contrasted with the earlier ‘unconscionable conduct’ cases where wives have been successful in arguing they were unduly influenced by their husbands to enter into business transactions which they did not understand.

In Yerkey vJones[19] Dixon J held that two situations could arise in a marriage when trust and confidence are displaced. One is where there is actual undue influence by a husband over his wife and the other where there had been a failure by the husband to explain adequately and accurately the surety transaction which he wanted his wife to enter into. Dixon J considered this type of situation resulted in a ‘special equity’ for wives because they did not understand the nature of the transaction. In the later case of Garcia v National Australia Bank Ltd[20] a married woman executed a mortgage with her husband over their home. She signed guarantees in favour of the bank which related to loans made to her husband’s business. In later divorce proceedings she sought to have the guarantees set aside because she said she did not understand the transactions she had entered into. The High Court held that it would have been unconscionable to enforce the guarantees against her.

The case of Clark[21] by contrast, indicates that there is an increasing focus by the courts on the necessity for good governance in the corporate arena and arguments by wives that they do not understand the obligations of accepting a directorship are no longer acceptable.

D The ‘reasonable steps’ defence in general

In general the courts are taking a tough stand on directors who fail to remit withholding tax as is demonstrated by the examples below.

In Deputy Commissioner of Taxation v Saunig[22] proceedings were issued against a director, Mr Saunig for failure to remit withholding tax. He raised a defence under s 222AOJ (3) of the ITAA36 arguing that he had taken that all reasonable steps to ensure that fellow directors complied with s 222AOB (1) to pay the outstanding withholding tax. In the period March to June 1997 he realised that the company had not remitted withholding tax. He contacted the other directors and informed them of the situation but was met with non co-operation. He did nothing further.

He made some payments to the ATO and even had a meeting with ATO officers, though no specific outcome was achieved. A meeting was held with the other directors where discussions revolved around the company going into though that never occurred. In August 1999, Mr Saunig obtained professional advice and then placed the company in administration with the consent of one of the other directors.

The Deputy Commissioner served a statutory notice on the three directors but only proceeded against Mr Saunig. He argued he had taken all reasonable steps to ensure that the outstanding tax was paid.

Heydon JA considered the concept of ‘reasonable’ and held that the test under s 222AOJ (2) was an objective one. His Honour held that there was nothing to suggest that ‘reasonable’ went as far as encompassing the actual knowledge of a director or a director who is ignorant of law or of any fact.

In rejecting Mr Saunig’s defence Heydon JA held:

While even in a relatively small organisation like the company in this case it may not be right to require each director to take personal steps to ensure compliance with s222AOB (1) (a), it was incumbent upon Mr Saunig to ascertain what the company’s duties in relation to tax installments deducted from employees’ wages were and to ensure that some system was in place which would produce compliance.’ ......’ Mr Saunig’s conduct must be judged not only by a reference to what he knew, but also by a reference to what he ought to have known[23]

Heydon J further held that Mr Saunig could have entered into a written agreement with the ATO or put the company into liquidation when he knew it was insolvent. He could also have obtained early legal advice whereby he could have confronted the other directors with the various options available to the company in light of its financial problems. The defendant had to prove his defence on the balance of probabilities, which he failed to do and was found personally liable.[24]

In Deputy Commissioner of Taxation v Stenner and Stenner[25] the Commissioner issued proceedings against a father and son. Many conversations had occurred between an officer at the ATO and Mr Stenner Sr with regard to settling the outstanding amount. An oral arrangement was entered into between the company and the ATO for a payment of $1000 per month. A sum of $45000 was paid and credited to the ATO but as there was never any written agreement. Ultimately the Deputy Commissioner issued a notice and then initiated proceedings to wind up the company.

Mr Stenner argued he had entered into an agreement with the ATO and had kept in contact with them advising them of his eagerness to settle the outstanding debt. He told the court that he advised that ATO that in order to keep the company afloat he was prepared to sell his personal property.

However, Brabazon J observed there was no written agreement as required under s 222ALA and in finding for the Commissioner stated that while Mr Stenner’s personal disappointment can be readily understood, there is no legal foundation to deny or suspend the Deputy Commissioner’s right to recover the directors’ debts due to the ATO.

In Deputy Commissioner of Taxation v Moss,[26] a written agreement was entered into between the company and the ATO to pay off outstanding withholding tax. The company failed to fulfil its obligations under the agreement and the Commissioner issued proceedings against Mr Moss. In his defence Mr Moss argued that had been obtained a loan to pay off the outstanding debt. He argued that in these circumstances he had taken all reasonable steps to ensure compliance with the agreement. The court came to the conclusion that all Mr Moss had was a hope and not an expectation that the debt would be paid. In finding for the ATO, the Court held that insufficient financial information had been placed before the court to support Mr Moss’s argument that his conduct was reasonable in the circumstances and the company could meet its obligations under the agreement.

In Deputy Commissioner of Taxation v George[27] Mr George, a director of a company, was appointed to the position of an acting District Court Judge between 1996 and 2000. He did not resign from his directorship during the appointment. At the end of his appointment on the bench he told the court he returned to take part in the management of the company. During the period he was on the bench, the company failed to pay withholding tax and the ATO issued proceedings against him. In the lower court Mr George succeeded in his defence by arguing that he had a reasonable excuse for not taking part in the management of the company during the period 1996 - 2000, due to his appointment as an acting District Court Judge. The ATO successfully appealed the court finding that at all times Mr George was a director and therefore involved in the management of the company.

E Appointment of a Public Officer

It is also important for directors to be aware that section 252 of the ITAA36 requires a company to appoint a public officer unless exempted by the Commissioner for Taxation. That person is responsible for ensuring compliance with the ITAA36 and its regulations. It is arguable that the public officer can be held personally responsible under s 252(i) for a company’s failure to comply with any tax obligation. However in Lean v Brady[28] the High Court held the sections as a whole were not designed to impose personal liability on a public officer or other officer. The decision has not been overturned. At the same time s 252(j) gives the Commissioner the power to take action against any director or other officer of a non-compliant company. If a company is convicted for committing a tax offence, those involved in the management of the company are deemed to have committed the offence.

F The defence of estoppel

It is worth mentioning the successful outcome in the case of Deputy Commissioner of Taxation v Winters[29] where the Deputy Commissioner brought proceedings for summary judgment against Mr Winters who relied on the equitable doctrine of estoppel.

Two defendant directors had failed to remit withholding tax and were issued a penalty notice under s 222AOE of the ITAA36. When they received the penalty notice they were attempting to sell the company because of its financial problems. There was also in place arrangements with the ATO to discharge the remittance. Following service of the notice, the ATO took steps to wind up the company. Evidence was adduced that the directors had undertaken discussions with the company accountant to put the company into voluntary administration. They had also made arrangements with the ATO to pay the outstanding tax by installments. Following receipt of the notice, Mr Winters gave evidence that he arranged a meeting with an officer of the ATO where various options were discussed including selling the company, but the ATO officer suggested that the company keep trading to pay off the debt.

In this case the defence of estoppel was successful and the application by the ATO for summary judgment was set aside. However, this is a limited defence as the trial judge, Moynihan J, made clear by citing Mason CJ in Maher and Commonwealth v Verwayen:

The result is that it should be accepted that there is but one doctrine in estoppel which provides that a court of common law or equity may do what is required but not more, to prevent a person who has relied on an assumption as to a present, past or future state of affairs (including a legal state of affairs), which assumption the party estoppped has induced him to hold, from suffering detriment in reliance upon the assumption as a result of the denial of its correctness. A central element of that doctrine is that there must be proportionality between the remedy and the detriment which is its purpose to avoid.[30]

VI CONCLUSION

Every person should be aware that before accepting the position of director and in order to protect themselves from being found personally liable for the tax debts of a company; they should carefully examine the financial affairs of the company. Prospective directors should check with the ATO (in writing) to make sure that the company has a history of complying with its tax obligations.

If those inquiries produce a positive result, and the directorship is accepted, the person is then put in the position of being bound to participate in the financial affairs of the company. If there are any signs of insolvency, a director should immediately consult with other directors to ascertain whether there is a cash flow problem and if there is, ascertain what can be done about it sooner rather than later.

Having accepted the position of director, a person must participate in the financial affairs of the company. There is absolutely no excuse under the legislation not to do so. If there are any signs of insolvency, a director should immediately consult with other directors to ascertain whether there is a cash flow problem and if there is, ascertain what can be done about it sooner rather than later.

The obligations placed on directors by the Commissioner are onerous and the Commissioner made that clear when on 29 January 2004 he wrote to the boards of all listed companies in Australia stating that corporate governance in relation to taxation is extremely important. He advised that boards of directors need to take a direct and active role in managing the risks associated with a company’s tax affairs and the need to ensure the correct amount of tax is paid. The warning applies equally to smaller companies as is evident from the cases referred to above.

If problems arise which cause non-payment of withholding tax, a written agreement should be entered into with the ATO (if available) or one of the other options under s 222AOE of the ITAA36 should be exercised. If a director decides to enter into an agreement with the ATO, this should be done at an early stage, particularly if there is any chance that the company will remain solvent. If there are insufficient assets and there are never likely to be sufficient assets to meet the outstanding debt, the company should go into administration or liquidation as soon as possible so that directors avoid personal liability and possible bankruptcy.

The judgment of Heydon JA in Deputy Commissioner of Taxation v Saunig[31] provides sound advice to directors when faced with possible insolvency problems:

The harshness [of the legislation] is to some extent ameliorated by the fact that the directors cannot be sued until a s 222AOE notice is served, by the time it has been served and a further fourteen days have passed the director will have had a period sufficient to procure the company to take one of the four steps referred to in s 222AOB (1). If one of the steps is taken the director ceases to be liable. Harsh or not, however, the legislative scheme in this respect is clear.

Voluntary compliance requires efficient systems being put in place by companies to ensure that tax debts are paid on time to the ATO. The above cases make it clear that non-compliance may lead to harsh results once a penalty notice has been issued by the ATO. ‘Avoidance’ of the onerous consequences that can result from court proceedings should be at the forefront of a person’s mind when they accept a directorship.


[1] I wish to express my thanks to Shirley Murphy for her assistance with earlier versions of this article.

[2] Allens Arthur Robinson file://C:Documents and Settings/Desktop/AAR accessed 22/12/2004.

[3] [2002] NSWSC 330.

[4] Ibid, para 78.

[5] This is available at: http://law.ato.gov.au/atolaw/view.htm?docid=RMP/PR0001.

[6] Buist v FCT, Ex Parte Buiste 88 ATC 4376.

[7] TAA53 16-85 - 16-105.

[8] TAA53 16-80.

[9] (1995) 95 ATC 4525.

[10] [2000] HCA 10; (2000) 199 CLR 370.

[11] [1998] NSWSC 64; (1997-1998) 43 NSWLR 271.

[12] [2001] NSWSC 1064.

[13] [2000] HCA 10; (2000) 199 CLR 370.

[14] (1995) 95 ATC 4587.

[15] [2003] NSWCA 62.

[16] Ibid, 69.

[17] [2003] NSWCA 91; (2003) 57 NSWLR 113.

[18] [1998] HCA 48; (1988) 194 CLR 395, 403.

[19] [1939] HCA 3; (1939) 63 CLR 649.

[20] [1998] HCA 48; (1998) 194 CLR 395.

[21] [2003] NSWCA 91; (2003) 57 NSWLR 113.

[22] [2002] NSWCA 390; (2002) 55 NSWLR 722.

[23] Ibid, 28 (cited at www.law.ato.gov.au).

[24] It is interesting to note that of the three directors the only one proceeded against by the Commissioner was the one who tried to do something to remedy the situation. Such an approach by the Commissioner brings very little credit on him and the ATO, and does nothing to engender confidence in the Commissioner’s ability to approach his duties with any measure of fair-mindedness.

[25] [2003] QDC 53.

[26] [2003] VSC 294.

[27] (2002) 55 NSWLR 510.

[28] [1937] HCA 75; (1937) 58 CLR 328.

[29] 1997 ATC 4967.

[30] Commonwealth v Verwayen (1990) 170 CLR 395, 413.

[31] [2002] NSWCA 390; (2002) 55 NSWLR 722, 731.


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