Proposed reforms to Division 269 of the Taxation Administration Act 1953 (Cth) (TAA) could extend the potential personal liability on directors to include a company's failure to pay the superannuation guarantee charge, and in some instances, to affect the ability for directors and/or their associates (such as family members) to claim tax credits under the PAYG rules where a company had failed to pay the relevant taxes.
The proposed reforms also involve the removal of the director penalty notice requirement for the Australian Taxation Office under Division 269, instead imposing an automatic director liability if the company had not paid the relevant tax within three months of its due date.
These reforms are still being considered by the government, and have been controversial – particularly the removal of the director penalty notice and the potential for tax impacts upon associates of directors.
Existing rules imposing liability
Existing provisions in the TAA can operate to impose personal liability on directors for company taxation and/or for penalties for a failure by the company to meet taxation obligations in certain circumstances.
These provisions are set out in section 8Y and in Division 269 of Schedule 1 of the TAA and operate to:
- deem a person involved in management (which is presumed to include a director) to commit a company's tax offence, and to be liable for any applicable penalty (section 8Y). It should be noted that it is possible for a penalty to be imposed under this provision, and then a reparation order to be sought under the Crimes Act 1914 or Criminal Code for any tax shortfall, as a taxation offence is deemed to be an offence against certain provisions of the Crimes Act and Criminal Code (definition of 'taxation offence' in section 8A of the TAA) and
- impose a penalty on a director (which has the Corporations Act 2001 (Cth) meaning, including a shadow director) or an administrator equal to the unpaid tax of a company where that tax is:
- PAYG, or payments of tax related to employment or work benefits (eg director fees, unused leave, compensation sickness or accident payments, Commonwealth education or training payments, payments to members of the Defence Force, some non-cash payments) and
- payments otherwise subject to withholding tax (eg payments of royalties, dividends, interest to foreign recipients, payments made by managed investment trusts, payments made to trust beneficiaries where those beneficiaries have not quoted their tax file number (Division 269 of Schedule 1).
It should be noted that in respect of Division 269, the Australian Taxation Office is unable to recover such a penalty from a director until 21 days following the date of a notice ('director penalty notice') given by the Australian Taxation Office to the director which seeks to impose the penalty. In addition, by virtue of section 269-45, directors are jointly and severally liable, and one director will have rights of indemnity against the company and the other directors.
Available defences under the existing rules
In respect of section 8Y of the TAA, there is an available defence if the person can prove they did not aid, abet or procure the relevant offence, and were not in any way by act or omission directly or indirectly knowingly concerned or a party to the offence.
In respect of Division 269 of Schedule 1 of the TAA, there are available defences for directors. The first defence is if the director can show that due to illness or some other good reason it would unreasonable to expect their participation in management and they did not actually participate in management of the company. The second defence is that the director took all reasonable steps to ensure compliance, or that there were no such steps that could be taken. What were 'reasonable steps' is considered in the totality of all of the circumstances, including when and for how long the director took part in the management of the company.
There is case law which suggests that these defences will be very rarely available. For example, in Saunig 2002 ATC 5135 a director who discovered that PAYE had not been paid to the Australian Taxation Office, advised the Australian Taxation Office, made efforts to seek to raise funds to pay the liability, was not considered to have taken all 'reasonable steps', as the director did not seek tax advice. Further, in Buist 88 ATC 4,376 a director who forwarded letters from the Australian Taxation Office seeking late returns to the company accountants and assumed the company accountants were dealing with the matter was considered 'knowingly' concerned in the company's offence as he omitted to follow matters up with the company accountants.
The other way that directors can seek to avoid liability under Division 269 of Schedule 1 of the TAA is by ensuring the tax is paid by the company (by way of an instalment payment arrangement agreed with the Australian Taxation Office for example), or placing the company into voluntary liquidation, or taking steps to have the company voluntarily wound up. All of those arrangements must be in place prior to the expiry of 21 days following the Director penalty notice from the Australian Taxation Office.
Status of proposed reforms
The government introduced the Tax Laws Amendment (2011 Measures No 8) Bill into Parliament on 13 October 2011. This omnibus Bill included a Schedule 3, which if passed would have extended the current director penalty regime and imposed automatic liability in certain circumstances.
The proposed reforms were to Division 269, and would have extended the potential personal liability on directors to include a company's failure to pay the superannuation guarantee charge, and in some instances, to affect the ability for directors and/or their associates (such as family members) to claim tax credits under the PAYG rules where a company had failed to pay the relevant taxes.
The proposed reforms also involved the removal of the director penalty notice requirement for the Australian Taxation Office under Division 269, instead imposing an automatic director liability if the company had not paid the relevant tax within three months of its due date.
Schedule 3 was removed from the Bill on 22 November 2011, following a recommendation by the House of Representatives Standing Committee on Economics. The remainder of the Bill has since passed into law.
The committee also recommended that the government investigate whether the Bill should target phoenix operators specifically and whether the proposed defences to liability should be expanded.
The proposed reforms are still being considered by the government, and have been controversial – particularly the removal of the director penalty notice and the potential for tax impacts upon associates of directors.
The government has indicated that it intends to bring the reforms back into Parliament as early as possible this year. At the time of writing, no further consultation has been announced.
This reform and the existing law means directors and general counsel should ensure that taxation matters are not neglected in an overall corporate governance strategy.
It should also be noted that the Australian Taxation Office has stated that the management of tax processes, as part of overall corporate governance, will be scrutinised when assessing a taxpayer company's overall risk weighting; a weighting which affects the likelihood of Australian Taxation Office review.
Minter Ellison's Tax Group can provide further guidance on robust tax risk management and governance strategies.