This article follows on from last month’s article on the new Director Penalty Notice provisions now residing in the Taxation Administration Act.
Under the old legislation, a director could avoid personal liability for a company’s tax debt (the director’s penalty) by causing the company to enter into a 222ALA Repayment Agreement with the ATO. The director’s liability would then be remitted and would only reappear, or more correctly a new penalty liability would arise, if the agreement fell into default.
We also mentioned in our last article how some inventive directors sought to even avoid this liability by changing directors before the agreement was negotiated, and once again becoming the director when the agreement fell into default.
Everyone knows that the Commissioner can collect overdue taxes. This right is set out in the Taxation Administration Act.
Recovering a tax related liability that is due and payable
255-5(1) An amount of a * tax related liability that is due and payable:
(a) is a debt due to the Commonwealth; and
(b) is payable to the Commissioner.
(2) The Commissioner, a Second Commissioner or a Deputy Commissioner may sue in his or her official name in a court of competent jurisdiction to recover an amount of a * tax related liability that remains unpaid after it has become due and payable.
Separate from repayment agreements, taxpayers can seek to have the time to pay taxes varied. This is not the object of this article (though interesting) and does remove a director’s obligation to pay by the original due date, because the due date itself is varied.
To defer the payment time Deferrals for particular taxpayers
255-10(1) The Commissioner may, having regard to the circumstances of your particular case, defer the time at which an amount of a * tax related liability is, or would become, due and payable by you (whether or not the liability has already arisen). If the Commissioner does so, that time is varied accordingly.
Note: General interest charge or any other relevant penalty, if applicable for any unpaid amount of the liability, will begin to accrue from the time as varied. See, for example, paragraph 5 15(a) of the Income Tax Assessment Act 1997.
(2) The Commissioner must do so by written notice given to you.
The Commissioner may also allow the taxpayer (as we are discussing director’s liabilities, the taxpayer in this case will be a company) to enter into a repayment arrangement – payments by installments. These provisions used to reside in the ITAA (section 222ALA and associated sections) until the change in July this year. They now reside in the Taxation Administration Act.
The essentials of the old provisions are retained. The Commissioner may allow the payment of a tax liability over time by installments. Though how these arrangements relate with a DPN and penalty provisions has changed.
To permit payments by installments
255-15(1) The Commissioner may, having regard to the circumstances of your particular case, permit you to pay an amount of a * tax related liability by installments under an * arrangement between you and the Commissioner (whether or not the liability has already arisen).
(2) The * arrangement does not vary the time at which the amount is due and payable.
Note: Despite an arrangement under this section, any general interest charge or other relevant penalty, if applicable for any unpaid amount of the liability, begins to accrue when the liability is due and payable under the relevant taxation law, or at that time as varied under section 255 10 or 255 20.
An Arrangement is defined as “any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.” This definition is held in the Income Tax Assessment Act 1997. It does not state in the definition or the section that the arrangement has to be in writing.
The first point of difference is that entering into a repayment arrangement is now not something that will cause a director to avoid personal liability for a penalty. The old section 222AOB allowed directors to cause the company to enter into 222ALA agreements (amongst other options) before the debt became due as a means of avoiding such liability. The current 269-15 does not have that provision. This is significant and is described further below.
269-15(1) The directors (within the meaning of the Corporations Act 2001) of the company (from time to time) on or after the initial day must cause the company to comply with its obligation. (2) The directors of the company (from time to time) continue to be under their obligation until:
(a) the company complies with its obligation; or
(b) an administrator of the company is appointed under section 436A, 436B or 436C of the Corporations Act 2001; or
(c) the company begins to be wound up (within the meaning of that Act).
The second point is that entering into a repayment arrangement is now not an option to remove personal liability for a penalty under a DPN. The old section 222AOE allowed directors to ‘remit’ the liability that was about to become collectable by the DPN by causing the company to enter into a 222ALA agreement. The current 269-25 sets out the provisions for issuing a DPN and the ability to commence proceedings to recover a penalty (see last month’s article called ‘Director Penalty Notices Revisited’ for details). The debt subject of the DPN does not disappear when an repayment arrangement is negotiated.
Further, section 269-15(3) sets a limitation on the Commissioner commencing or further proceedings whilst a repayment arrangement is ‘in force’. That mean that as soon as the arrangement is breached and not ‘in force’ the Commissioner can proceed for the original penalty. A repayment agreement under section 255-15 does not remit the original penalty, it just delays it collection.
269-15(3) The Commissioner must not commence, or take a procedural step as a party to, proceedings to enforce an obligation, or to recover a penalty, of a director under this Division if an * arrangement that covers the company’s obligation is in force under section 255-15 (Commissioner’s power to permit payments by instalments).
Note 1: The arrangement may also cover other obligations of the company.
Note 2: Subsection (3) does not prevent the Commissioner from giving a director a notice about a penalty under section 269-25.
This effectively blocks directors from avoiding liability from the initial date when the tax is incurred or deducted, through to when it is due for payment and until it has been paid or otherwise the company complies with the Act.
The new provisions, whilst still allowing the company to pay its tax debts over time by installments, do not give directors the same ‘get out of jail’ card that the old provisions provided. The debt may be payable over time, but directors are still liable for their penalties until it is paid in full under that arrangement.