Defending director penalty notices – what are reasonable steps?15 December 2016 Topics: Tax disputes, Income tax and CGT advice
Directors are personally liable for particular company tax debts, including superannuation liabilities and PAYG withholding amounts.
Before enforcing the debt against the directors, the Commissioner is required to send a director penalty notice (DPN).
One of the defences available to directors challenging a DPN is that they took all reasonable steps to ensure:
- the company complied with its obligation, that is, to pay the debt;
- an administrator was appointed over the company; or
- the winding up of the company had begun,
or that there were no reasonable steps they could have taken to ensure that any of these things occurred.
The question often arises as to whether particular acts amount to ‘reasonable steps’. The Queensland Court of Appeal has recently had to consider this test in the context of an appeal against a summary judgment in favour of the Commissioner.
What happened in Shaw v Deputy Commissioner of Taxation; Rablin v Deputy Commissioner of Taxation  QCA 275?
The director argued that they took all reasonable steps to ensure that the company complied with its obligation to pay PAYG withholding amounts and that, if they didn’t, there were no reasonable steps that could have been taken.
The ATO applied for summary judgment against the directors, which the Court granted. The director then appealed that decision.
The directors argued that the reasonable steps they took to ensure that the company complied with its obligations included:
- attempts to obtain finance and extend the company’s current finance facilities;
- engaging a specialist business consultancy firm for advice and to assist with negotiations with the bank; and
- later, when the negotiations with the bank failed, beginning the process to wind up the company.
The Court of Appeal found that the directors were not obliged to take steps to ensure that the company was placed into administration or liquidation, when they were taking reasonable steps to ensure that the company paid its tax debts.
It was reasonable for the directors to pursue the option of obtaining third party finance for as long as it was reasonable for the directors to expect that the finance would have been available to the company to pay its tax debts.
The evidence that the directors relied on was sufficient to show that a defence under the legislation was potentially available – therefore, the test for summary judgment failed and the Court of Appeal allowed the directors’ appeal and set aside the summary judgment.
What should you do if you receive a DPN?
As a director, it is important to remember that you can be personally liable for some tax debts.
It is vital that you take all steps to ensure that the company complies with its tax obligations, including all reporting obligations.
If you do receive a DPN from the ATO, it is important that you act quickly and form a strategy to respond to the DPN and set out any relevant defences.
It is also important that you compile evidence of all of the steps that you took to ensure that the company complied with its obligation or caused an administrator or liquidator to be appointed.
In some cases it may be possible to prevent the Commissioner from starting court proceedings at all. Our clients have experienced that these cases often involve engaging with the Commissioner at an early stage and detailing any defences that are available.
Please contact a member of the team if you would like to discuss.