I had one of those conversations with a few directors of a company recently where you just knew that everything you were going to say was the opposite of what they wanted to hear, and what they thought the legal position was. I was talking to directors of a company that was about to be wound up, and who were concerned about their personal positions as they related to outstanding tax.
The conversation started with:
Q: Have you received any Director Penalty Notices yet?
A: Yes, I did about a month ago.
The conversation went downhill from there.
Most directors are aware that they can become personally liable for unpaid tax liabilities. The TAA (Tax Administration Act – in Schedule One) sets out a director’s obligation to “cause the company to comply with its obligation” to pay its tax liability. This does not create financial liability just an obligation to make the company pay its tax.
A director becomes liable for a penalty if they do not cause the company to pay its liabilities by the due date. The directors I was talking to knew that the company had not paid its tax, amongst other debts. They had taken some action to limit their exposure by having a few of them resign before the company would be wound up. In fact some resigned before the DPN was issued, but not the one who received it.
They had just been told that this did not matter, that they could still be liable for the tax debts. They spoke to me to get some clarification. The financial strain had also greatly strained relations between these directors – all until now friends. I was not making matters better.
The general position is understood to be that directors of companies have an obligation to cause the company to pay its tax and any person who is a director at the time that the company does not pay its tax is liable for a penalty. But the position is wider than that.
Penalty for director on or before due day
269-20(1) You are liable to pay to the Commissioner a penalty if:
(a) at the end of the due day, the directors of the company are still under an obligation under section 269-15; and
(b) you were under that obligation at or before that time (because you were a director).
The relevant words in the section mean that you are liable for the penalty if you were under the director’s obligation (to make the company pay tax) “at or before” the due date for payment. The obligation is created when the tax is deducted. So as long as you were a director for any of the period between when the tax was deducted (before the due date) and when it is due for payment (at the due date), you are liable for the penalty if the company does not pay the tax, even if you resigned during that period.
Not that it was relevant to my conversation, but new directors appointed after the due date may become liable for the company’s past tax debts simply by virtue of being appointed. Directors appointed after the due date are liable for the same penalty. That liability commences 14 days after the appointment if the company still has not complied with its obligation to pay its outstanding tax. The wording in the section could read “at or before or anytime afterwards”.
All of this leads to a position where a director is liable if they were a director when (i) tax was deducted (ii) it was payable, or (iii) the tax remained payable (subject to the 14 day period).
The TAA does not allow collection of the penalty without a DPN being issued. Actually, that is not entirely correct. The TAA does not allow the ATO to ‘commence proceedings’ to recover the penalty without issuing a DPN. Even though some of the directors had resigned before DPNs were issued, they could still be issued with DPNs as they are still liable for the penalty. Also the ATO has other collection techniques that do not require the commencement of proceedings and therefore the issuing of DPNs.
It appears then that the director with the expired DPN is both personally liable for the penalty and the ATO can collect it by commencing proceedings. The others are not free from liability as they had thought, but if the company is placed into liquidation before the DPNs are issued or within the 21 days, they would be safer.
Luckily (I suppose) the director who received the DPN has assets to satisfy that claim. It also appears that the other directors are safe from liability because this director will pay the debt. Maybe, but not necessarily.
The directors (now ex-directors) who did not receive DPNs are still liable for the penalty and the ATO can collect it using other means, as long as they do not commence proceedings. Given that one director is likely to pay the ATO, it is not likely that the ATO will take any action at all. They can only collect the debt once.
But the director who pays the penalty has some rights against his other directors. The Act sets out rights where one director pays a liability and the other directors were also liable to pay penalties related to their obligation. The section gives the paying director a right of contribution from directors (or ex-directors).
The question that I have not seen answered is whether the other directors need to have been issued DPNs before they fall into this section. I think not. The section appears to give rights to the director who pays the ATO to recover from “anyone else” whom “the Commissioner is entitled to recover, a penalty under this Division”. The ATO “must not commence proceedings to recover” until it has issued a DPN, but technically has a right of recovery without commencing proceedings. That is, they are entitled to recover, just not commence proceedings to do so.
I will be interested to see what the courts make of this in due course. I cannot find any decision on this point yet.
Directors’ rights of indemnity and contribution
269-45(1) This section applies if you pay a penalty under this Division in relation to a liability of the company under an obligation referred to in section 269-10.
(2) You have the same rights (whether by way of indemnity, subrogation, contribution or otherwise) against the company or anyone else as if:
(a) you made the payment under a guarantee of the liability of the company; and
(b) under the guarantee you and every other person who has paid, or from whom the Commissioner is entitled to recover, a penalty under this Division in relation to the company’s obligation were jointly and severally liable as guarantors.
Given the directors had a strained relationship at the start of the conversation, I cannot imagine I have made it any better.