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Changes to director penalty notices – directors beware if there are unpaid taxes

02 Jul 2010

We recently (19 April 2010) sent a newsflash concerning changes to the ATO’s power to require security. The clamping down on unpaid taxes and the increased focus on phoenix avoidance continues with amendments just made to the Income Tax Assessment Acts.

These amendments have been introduced pursuant to the Tax Laws Amendment (Transfer of Provision) Bill 2010 which received royal assent on 29 June 2010 and came into effect on 1 July 2010.

The bill has been moved through parliament very quickly (even with a change in prime minister). It was passed by the lower house on 13 June 2010, and by the senate on 17 June 2010 without amendment.

These amendments have significant effect on the operation of the director penalty notice (DPN) provisions of the Income Tax Assessment Act 1936 (Cth). These include changes relating to the collection and recovery of tax, forgiveness of commercial debts, leases of luxury cars, farm management deposits and general insurance.

Relevantly, the amendments include the following:

  • DPNs now take effect from the date they are posted, as opposed to the date they were received by the director(s) – this was the case at law following the New South Wales court of appeal decision in Deputy Commissioner of Taxation v. Meredith [2007] NSWCA 354, but has been subject to criticism. This is now enshrined in the legislation.
  • The period provided by DPNs will increase from 14 to 21 days before the commission will take recovery proceedings against the director(s) – there have been complaints that the time for compliance (given some remote directors) was unreasonable and this addresses one common concern.
  • The company will have a period of 21 days rather than 14 days to either comply with its tax obligation, appoint a voluntary administrator or wind the company up – again, allowing more time and in this circumstance, bringing the time limit in line with the time for a creditors’ statutory demand (although that of course runs from the date of receipt by the company and not the date of posting).
  • The provisions have been amended so that entering into an instalment arrangement will not remit the director’s obligations under the DPN – this changes the position previously as an arrangement to pay the tax would bring the DPN to an end.
  • Amendment of the provisions to make it more difficult for a director to rely on the defence that the director did not take part in the management of the company as a result of ‘illness or other good reason’ - it is now a requirement that the director show it would have been unreasonable to expect the director to have taken part in the management of the company at that time. This overcomes a number of decisions where the ATO was unsuccessful in DPN proceedings where directors have relevantly relied upon an extended illness or even, in one case, the illness of their wife to say that they were not involved in management.

These amendments are particularly relevant to directors of companies and their advisers, where these reforms are aptly described as being ‘anti phoenix’ reforms.

Tightening the DPN regime will have positive implications for those giving advice to directors of companies as they will now be in a position to advise before the company gets in such a fraught financial position that they are beyond repair.

Currently, the DPN provisions only apply to certain withholding taxes. Given the complexity associated with the ATO issuing them (and having to separate the debts in their running balance accounts), they can take a very substantial time to issue. They can also be very difficult for directors to reconcile with any other notices issued by the ATO. Amendments proposed by the ATO (but not yet implemented) could result in either or both of the following:

  • Directors being personally liable for tax debts of a company if they remain outstanding for three months or more.
  • The ATO being able to issue DPNs for any and all taxation liabilities of a company.

We will send further updates on these issues as amendments are progressed.