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Company Law News November 2010

Director Penalty Notices [DPNs]

The Australian Taxation Office has changed the rules with Directors Penalty Notices, so directors need to be on their guard to act quickly to avoid personal exposure

These notices may be issued under the Income Tax Assessment Act 1936 [ITAA], and render a company director personally liable for any unpaid corporate withholding tax (which may include GST, capital gains tax, unpaid PAYG withholding tax and income tax) owed by their company unless that director:

  • Arranges for the company to pay the amount outstanding as stated in the notice;
  • Enters into a payment arrangement with the Commissioner of Taxation, on behalf of the company;
  • Places the company into voluntary administration;
  • Commences the liquidation of the company.

Amendments to the ITAA that have recently come into force make a number of changes to this regime. 

Formerly a director had 14 days to respond to or comply with a DPN before the Commissioner could commence proceedings to recover the outstanding amount from the director personally.  Under the amendments, this period will be extended to 21 days.  This is a relatively significant change, particularly given that the DPN notice period has been held to commence at the date the notice was posted to the director, and not the date it was received [DCT v Meredith].  Under the reforms, it is no longer be necessary for the Commissioner to prove that a director has received a DPN: the mere fact of its posting will be sufficient in this respect.

Unlike the present regime, the amendments also mean that a director may be personally liable where a payment arrangement entered into by the company with the Commissioner is breached.  Formerly, entrance into an arrangement effectively absolved the director of personal responsibility. 

While a director was formerly absolved from responsibility under a DPN where they were able to show that ill health prevented them from properly attending to the company's affairs, the director will be required under the amendments to show that their ill health was such that it would have been unreasonable to expect them to participate in managing the company.

Significantly, under the new regime, a director is automatically liable for a company tax liability that is at least 3 months overdue.  Formerly, liability did not flow until the director received a DPN, which could often be a year or more after the formal due date of the relevant tax liability.  

The reforms broadly heighten the responsibilities of directors with respect to the payment of their company's tax liabilities.  Company directors cannot presume that they may escape this liability and they should be aware of their responsibilities.

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