The tax law provides that a company director may become personally liable for an amount equivalent to the company’s unpaid taxation liabilities – they may receive what is called a director’s penalty notice. This issue is not new, but is regularly on the ATO’s radar.
A recent court case in NSW has potentially changed the landscape in this area of the law and directors need to be aware of what has happened.
So, how can a director come to be in this position?
Where a company fails to remit PAYG withholding amounts (moneys deducted from the salaries or wages of its employees) to the Tax Office, those who were directors of the company at that time will be personally liable for an amount equal to the unremitted or unpaid amounts.
Under the tax law, the director penalty provisions automatically cause directors to become personally liable for this amount. 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.
And 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.
As noted above, in general, directors have 14 days within which to respond to a director’s penalty notice issued by the Tax Office. However, the crucial question is from when that 14 days starts to run.
A decision by the NSW Court of Appeal in December 2007 (DCT v Meredith) found that a director’s penalty notice is effectively served from the time at which it is correctly posted by the ATO and that it is not open to the director to argue that non-delivery equates to non-service. The result was that a director’s penalty notice sent to a director by ordinary pre-paid post will be “given” to the director at the time the notice is posted – and not at the time when it would have been delivered by ordinary post. So, the 14-day period would run from the date the notice is posted by the ATO.
That may now change as a result of a February 2011 decision of the NSW Court of Appeal (Soong v DCT).
In that case, the Court held that the Meredith decision was wrong and held that the 14-day period within which a director is required to take specified action in response to a director’s penalty notice ran from the date of the delivery of the notice, and not from the date of its posting.
This is significant and effectively gives directors a little more time within which to act. It will be interesting to see the ATO’s reaction to that court decision.
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. Before the Commissioner could recover the penalty, he was required to give a notice to the director which gave the director 14 days to take one of a number of steps (including, as noted above, placing the company under administration).
On November 29, 2007, notices were sent by post to the director at her home address. The notices were delivered on November 30, 2007 and received by the director on December 1, 2007. On December 14, 2007, an administrator was appointed to the companies. The Commissioner sought to recover the penalty on the basis that the companies had not been put into administration within 14-day period as required.
The NSW Court of Appeal unanimously held that the 14-day period ran from the date of delivery of the notices, and not their posting. In doing so, it noted that the relevant tax law provided that one way the Commissioner may “give” a 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 arriving at this conclusion, the Court of Appeal held that the decision in Meredith should not be followed as it was “clearly wrong”.
SME directors should take note of the Soong decision.
Being a director of a company with unpaid tax bills can have serious financial consequences.
Company directors must not delay in responding to a director’s penalty notice. They should consult their accountant or adviser immediately one is received.
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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