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At Odyssey Legal, our expert tax debt dispute lawyers understand the complexities of these disputes, including the defences that may arise and the avenues to negotiate with the ATO.
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Executive Summary
Following on from our previous tax debt disputes articles, this article will focus on the defences to penalty under section 269-35 of Schedule 1 of the Taxation Administration Act 1953 (Cth) (TAA).
Under section 269-35 of Schedule 1 of the TAA, the director/s have an obligation to ensure that the company complies with its taxation obligations, including (among other things) lodgments and payments to the Australian Taxation Office (ATO). If the director fails to comply with their obligations, then they may be liable for a penalty equal to the unpaid amount of the company’s liability under its taxation obligations. The two (2) main defences to a penalty under this section are ‘Illness’ and ‘All Reasonable Steps’.
Within this article, our tax debt dispute lawyers will set out the requirements for the defences to arise and consider the relevant decisions of the Court. Director’s Penalty
Section 269 of Schedule 1 of the TAA sets out the penalties for directors of companies that fail to comply with their tax obligations. This can include a failure of company to meet their tax obligations regarding Pay As You Go (PAYG), Superannuation Guarantee Charge (SGC), and Goods and Services Tax (GST). If the director fails to comply with their obligations, then they may be liable for a penalty equal to the unpaid amount of the company’s liability under its taxation obligations.
Section 269-25 of Schedule 1 of the TAA outlines the requirement for the ATO to issue a DPN prior to commencing proceedings. The ATO may also issue a letter of demand or a garnishee notice to your bank, seeking to garnishee funds from your accounts.
Defences
If the ATO seek to commence action, or have taken action against you, then you may not be liable for this penalty if you can satisfy a defence under section 269-35 of Schedule 1 of the TAA. The requirements for the defences are set out as follows:
‘Illness
(1) You are not liable to a penalty under this Division if, because of illness or for some other good reason, it would have been unreasonable to expect you to take part, and you did not take part, in the management of the company at any time when:
(a) you were a director of the company; and
(b) the directors were under the relevant obligations under subsection 269-15(1).
All reasonable steps
(2) You are not liable to a penalty under this Division if:
(a) you took all reasonable steps to ensure that one of the following happened:
(i) the directors caused the company to comply with its obligation;
(ii) the directors caused an administrator of the company to be appointed under section 436A, 436B or 436C of the Corporations Act 2001;
(iia) the directors caused a small business restructuring practitioner for the company to be appointed under section 453B of that Act;
(iii) the directors caused the company to begin to be wound up (within the meaning of that Act); or
(b) there were no reasonable steps you could have taken to ensure that any of those things happened.
(3) In determining what are reasonable steps for the purposes of subsection (2), have regard to:
(a) when, and for how long, you were a director and took part in the management of the company; and
(b) all other relevant circumstances.
(3AA) If the obligation referred to in subparagraph (2)(a)(i) is an obligation to pay an amount of an estimate of an underlying liability under Division 268, that reference to an obligation includes a reference to the obligation to pay the underlying liability.
(3AB) For the purposes of subsection (3AA), assume that the underlying liability exists as identified in the notice of the estimate under section 268-15….’
These defences can often be difficult to satisfy, because:
1. To satisfy the ‘illness’ defence, the director/s would need to establish that they were unable (or it was unreasonable for them) to manage the company for all relevant periods under the director penalty notice (DPN).
2. To satisfy the ‘all reasonable steps’ defence, the director/s would need to establish that upon becoming aware of the company’s inability to comply with its obligations, they acted promptly and took all reasonable steps to cause the company to comply, including (but not limited to):
a. Obtaining finance from a third party or additional funding from a lender to pay the tax debt; or
b. The director/s loaning the funds to the company to pay the tax debt; or
c. Selling assets to pay the tax debt; or
d. Causing the company to be placed in administration or liquidation or appointing a restructuring practitioner.
The Courts will consider the steps taken by the director/s objectively and determine whether the director/s acted reasonably and promptly to address the company’s inability to comply with its obligations.
If you find yourself in this predicament with the ATO, our tax debt dispute lawyers can assist with advising on whether any of the defences arise in your particular circumstances and disputing any claim by the ATO.
I received a DPN but wasn’t an appointed director?
Section 9AC of the Corporations Act 2001 (Cth) (the Act) defines a director as:
‘(1) A director of a company or other body is:
(a) a person who:
(i) is appointed to the position of a director; or
(ii) is appointed to the position of an alternate director and is acting in that capacity;
regardless of the name that is given to their position; and
(b) unless the contrary intention appears, a person who is not validly appointed as a director if:
(i) they act in the position of a director; or
(ii) the directors of the company or body are accustomed to act in accordance with the person's instructions or wishes (excluding advice given by the person in the proper performance of functions attaching to the person's professional capacity or their business relationship with the directors or the corporation)….’
Subparagraph (b) is generally referred to as a shadow or de facto director. This means that even if you weren’t formally appointed, you could still be liable for a penalty under the TAA, as well as a penalty for a breach of any director’s duties that may arise under the Act.
Relevant Case Law
The following cases provide guidance on the issue of whether a person was a director for the purposes of the TAA or the Act:
1. Within Deputy Commissioner of Taxation v Jones [2015] QDC 215, the Court stated:
‘[13] The question of whether a person was acting in the position of a director was considered by Williams J in Re Valleys Rugby League Football Club Ltd [1997] 2 Qd R 645. After a full analysis of the authorities, his Honour concluded at p 657 that the respondent met that test because she had performed acts which could only be done by a director in accordance with the articles when she was asked to do so, and was prepared to hold herself out as a director when for example giving instructions to the club’s solicitor. She had purported to act as a director when executing a notice of appointment of administrators on a particular day. Accordingly she was within the definition of “director” in the then Act.
[14] In Deputy Commissioner of Taxation v Austin (1998) 28 ACSR 565 Mr Austin had held himself out as a director by signing on behalf of the company an agreement to pay outstanding tax debts by instalments, and by undertaking other tasks which suggested continuing involvement with the management of a company after he had formally resigned as a director. Madgwick J said at p 570: “The extent to which and the circumstances in which the person has so acted will nevertheless be of importance.”
[15] In the present case, it does seem strange that the defendant, while claiming that she was not a director, signed or otherwise certified a series of forms for submission to ASIC which denoted her expressly in the capacity as director. On the other hand, the defendant argues that these forms were prepared by someone else and that she was signing them because she understood that by doing so she would achieve the correction of the ASIC records which had incorrectly recorded her as a director. In effect, she was not deliberately acting as a director by doing this. She did not originally deliberately act as a director by signing the form certifying to her appointment as a director, because that form was signed on a precautionary basis in circumstances where there was a prospect of her becoming a director, which did not eventuate, and where she says she did not intend that the form would be used.’
2. In Tourprint International Pty Ltd v Bott [1999] NSWSC 581 (Tourprint Case), the Court held (among other things) that a director cannot rely on ignorance of or neglect of his or her directors’ duties. In particular the Court outlined that:
‘Mr Bott clearly did not show a proper degree of commitment to involvement in the financial management of the company, for he was never involved in financial management at all. He ought to have realised that by not having any such involvement, he was not properly discharging his responsibilities as a director. He ought to have taken steps from the outset, and at least by mid-1993, to ensure that he had a proper degree of involvement as a director in the management of the company. He ought, in short, to have confronted Mr Moore and insisted upon proper involvement in the company's affairs. He cannot now treat Mr Moore's deceptive conduct as a good reason for not taking part in management when he did not assert his rights as a director from the outset and with vigour.’
3. The New South Wales Court of Appeal in Deputy Commission of Taxation v Clark [2003] NSWCA 94 (Clark Case), in considering the Tourprint Case at [35] - [36]:
35 In Manpac Industries Pty Ltd v Ceccattini (2002) 20 ACLC 1,304 at [70] Young CJ in Eq commented on this passage in Palmer J’s judgment:
“… his Honour sought to criticise part of the decision in Tourprint if it meant what his Honour thought it could possibly mean, though he agreed in the result. I think, with great respect, that Tourprint did not mean what his Honour thought it might possibly mean.”
[36] I return to Palmer J’s judgment:
“[121] … it may be noted that paragraph 312 of the Harmer Report recorded two submissions as to the appropriate wording of the defence of non-participation in management, one being for “ other unavoidable cause ”, the other being for “ other reasonable cause ”. Neither of those submissions was adopted. Instead, the Commission recommended the words “ other sufficient cause ”. The legislature, however, did not follow that recommendation. Doubtless, as suggested by Mahoney JA in Lewis (supra), the parliamentary drafter of subsection (4) had to determine what was the “ true reason ” of the defence and had to consider a compromise amongst a number of considerations.
‘[122] I am of the opinion that the Court should not approach a defence under s.588H(4) of non-participation in management "for good reason" trammelled by a fixed view as to where policy considerations lie. The words "good reason" are deliberately as wide as they could be, in order that the Court may determine each case on its own particular facts. The words "good reason" do not carry with them the relative standard of measurement inherent in the words "reasonable cause" or "reasonable grounds" in the way those words do where used in s.556(2)(b) of the Code or CA s.588H(2) and (3). But that does not mean that the Court is free to apply idiosyncratic notions of justice or fairness when determining whether "good reason" has been shown for the purposes of subsection (4), nor does it mean that the duties imposed on directors under the Corporations Act and the general law are of no greater significance than any other consideration.
[123] In my opinion, in evaluating a defence under subsection (4) it is proper to start with the assumption that a person who accepts appointment as a company director has a sufficient understanding of the responsibilities which that office carries with it to know what is required of him or her in order to discharge those responsibilities as the law requires. That assumption is justified in a society which is generally literate, educated to secondary school standard, exposed to commercial transactions at varying levels ranging from the purchase of a car or home to running a small business, and in which the professional assistance of accountants and solicitors is readily available. But that assumption is by no means an irrebuttable presumption. Many examples can readily be given in which the assumption would not be valid: recent immigrants from non-English speaking countries who are themselves not English speaking; those with limited education and little, if any, exposure to a commercial environment, such as indigenous people in remote areas; those with intellectual disabilities, to name but a few."
The above cases demonstrates that any individual that holds themselves out to be a director, acts in a manner consistent with being a director or otherwise operates as a shadow director (instructing the appointed director) could be liable for a penalty under the TAA, even if they are not formally appointed. Further, that a director cannot simply ignore or neglect their duties under the TAA.
Summary
The ATO have and continue to crack down on outstanding tax debts, including debts that occurred over ten (10) years ago.
Under section 269-35 of Schedule 1 of the TAA, a director (including a shadow director or de facto director) can still be personally liable to pay a penalty equal to the company’s outstanding liable, even after they have placed the company into liquidation.
There are however two (2) main defences available to director/s to avoid personal liability for a penalty, namely the ‘Illness’ and ‘All Reasonable Steps’ defences. There are however strict requirements to satisfy these defences and obtaining legal advice at an early stage is crucial to resolving the dispute efficiently.
At Odyssey Legal, our expert tax debt dispute lawyers understand the complexities of these disputes, including the defences that may arise and the avenues to negotiate with the ATO. Don’t navigate this issue alone – schedule your free 15-minute consultation with our team today and let us guide you towards a resolution.
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