The Tax Office recently released a Decision Impact Statement on the decision handed down in Eaton & Ors v DCT (2006) 64 ATR 415. The main question asked in that case was whether a Deed of Company Arrangement extinguishes a director penalty liability for the purposes of s 222AOH of the ITAA 1936.
On 11 July 2002, the ATO issued a director penalty notice (“DPN”) to each director of the company in relation to unremitted group taxes. The notice required the directors to do one of the usual four things within 14 days of receipt. The directors did not comply with the notice by the due date (26 July 2002) and the Commissioner was able to take recovery action against the directors for the penalty amount.
On 17 July 2003 (some 3 weeks after the expiration of the DPN) the company appointed a voluntary administrator and subsequently executed a Deed of Company Arrangement. The Deed of Company Arrangement provided for a payment of $51,000 and for all creditors to release the company from all of its debts. The directors argued that the Deed of Company Arrangement extinguished the director penalty liability for the purposes of section 222AOH of the Income Tax Assessment Act (ITAA).
The Court rejected that a payment under the terms of the Deed of Company Arrangement had the effect of discharging the director penalty liability. Section 222AOH of the ITAA refers to amounts being “paid” or “applied” to the Commissioner. If an amount is paid or applied towards a DPN liability, then any payments made can be used to reduce or discharge the liability of any director who is sued for the same liability.
In this case the $51,000 was paid to a deed administrator under the terms of the Deed of Company Arrangement. The amount was not paid to the Deputy Commissioner of Taxation. The Court confirming that a discharge must mean a release, or extinction by the fulfillment, performance, execution of an obligation, duty, function etc. Payment to the deed administrator was not a discharge of this debt.
The bottom line continues to be that directors ignore DPN’s at their peril.