Company directors in general (and it doesn’t seem to matter whether they are directors of small or large companies) have really been “under the pump” lately. The scrutiny screws are really being turned.
Regulators like the ATO and ASIC have increasingly turned their attention to directors, and issues such as director and executive remuneration, and the recent Centro Properties case (ASIC v Healey & Ors [2011] FCA 717) on the duties and responsibilities of directors and company boards, have thrown the spotlight firmly on directors.
On the tax front, the pressure has only increased with the Government’s move against so-called “phoenix” activities by companies. The Government has recently released of draft legislation that would increase the personal liability of company directors for withholding of PAYG (Pay-As-You-Go) and Superannuation Guarantee amounts (the compulsory 9%) from employee wages.
With all that’s going on, company directors might be wondering what will happen next. Is there any good news around for directors? Well, maybe there is, and it’s come from an unlikely source – the High Court!
The positive news comes from the High Court’s refusal to grant a Deputy Commissioner of Taxation’s application for special leave to appeal against the decision of the NSW Court of Appeal in Soong v DCT [2011] NSWCA 26. The Court of Appeal decision, which now stands, had held that the 14-day period within which a director is required to take specified action in response to a director’s penalty notice from the Tax Office ran from the date of the delivery of the notice, and not from the date of its posting.
The Soong case involved a director of several companies who was assessed by the ATO to be liable for directors’ penalty tax of over $1 million for non-remitted withholdings of PAYG deductions from the salaries and wages of company employees.
The director penalty provisions automatically cause directors to become personally liable for unpaid PAYG withholding amounts. This penalty comes in the form of a director’s penalty notice. Generally speaking, a director has 14 days within which to respond to a penalty notice.
Under the law, directors have four options to avoid personal liability. This can be done by ensuring that the company, on or before the due date for payment:
Failure to do one of those four things by the due date will result in each director automatically incurring a penalty equal to the company’s outstanding PAYG withholding liability.
It should also be noted that new incoming directors can be caught for PAYG debts incurred before they became directors. A person who later becomes a director of a company which has an outstanding PAYG withholding liability will also incur a penalty equal to that liability unless one of those four things mentioned above occurs within 14 days of them becoming a director.
While directors have 14 days within which to respond to a director’s penalty notice issued by the Tax Office, the crucial question is from when that 14 days starts to run.
A majority decision by the NSW Court of Appeal in December 2007 (in DCT v Meredith (2007) 69 ATR 876) found that a director’s penalty notice is effectively served from the time at which it is correctly posted by the ATO. However, the Court of Appeal in Soong unanimously held that the Meredith decision was “clearly wrong” and should not be followed and that the 14-day period ran from the date of delivery of the notices, and not their posting.
In doing so, the Court noted that the relevant tax law provided that one way the Commissioner could “give” a director’s penalty notice was by sending it by post. It then found that in terms of s 29 of the Acts Interpretation Act 1901 (which specifies what conduct that will constitute postal service in the absence of a contrary intention, and the date of service unless the contrary is proved), “service” is deemed to have been effected at the time at which the document would be delivered in the ordinary course of post.
In Soong, the Court of Appeal said that the Meredith decision should have found that the relevant tax law was subject to the first limb of s 29 of the Acts Interpretation Act 1901 unless a contrary intention was established, and that in the absence of proof to the contrary, the second limb of s 29 was invoked such that service of the notice was deemed to have been effected at the time of delivery in the ordinary course of post.
The High Court presumably considered that the ATO did not have sufficient grounds to have the matter heard by it, so refused the ATO’s application for special leave to appeal.
The decision represents a win, and arguably a “commonsense” win (commonsense does not always apply in tax matters!), for company directors. Of course, affected directors still have to ensure their company takes one of the four options if they are to avoid personal liability, but at least the 14-day clock within which they must respond to a penalty notice should now only start to run from the date of the delivery of the notice.
It might be expected that the Tax Commissioner will issue a response to the High Court’s decision.
** The Soong case concerned the situation where the notices were delivered on November 30, 2007 and received by the director on December 1, 2007. The law has since been changed so that, with effect from July 1, 2010, the relevant course of action must be taken by the director within 21 days (instead of the previous 14 days) after the Commissioner sends the notice. However, the issue about from when the 21 days begins to run is still relevant.
Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions . 
For more Terry Hayes features, click here.
Smart Company is the leading online publication in Australia for free news, information and resources catering to Australia’s entrepreneurs, small and medium business owners and business managers.
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