Important amendments to the Income Tax Assessment Acts have been introduced under the Tax Laws Amendment (Transfer of Provisions) Act 2010 (Cth.) (“the Amendment Act”) which came into effect on 1 July 2010.

The amendments have a significant affect on the operation of the Director Penalty Notice provisions of the Income Tax Assessment Act 1936 (Cth.) (“the Act”).

Current regime

The current Director Penalty Notice regime will be familiar to many. Currently, Director Penalty Notices operate as a tool used by the Commissioner to enforce a director’s duty to cause the company of which he or she is a director to remit all withholding amounts to the Commissioner.

The Commissioner enforces this duty by issuing what is known as a Director Penalty Notice to director which is equal to any outstanding tax payable by the company. The director is granted 14 days (now 21 days – see below) to comply with the Notice. If within the notice period the director fails to take the requisite action to comply with the Notice (see below), the Commissioner will be entitled to take action against the director personally to recover the amount of the Notice.

Amendments

The most significant of the amendments are:

1. Director Penalty Notices now take effect from the date upon which they were posted, not on the date which they were received. The Court of Appeal in the decision of Deputy Commissioner of Taxation v Meredith [2007] NSWCA 354 previously found that this was the rule to be applied at law, however the decision has been subject to criticism and the rule has now been conveniently encompassed in the legislation.
2. The notice period provided to directors under Director Penalty Notices before the Commissioner will take action against the relevant director has been extended from 14 days to 21 days.
3. A director will no longer avoid becoming personally liable for the company’s taxes if, during the 21 day notice period, they enter into a repayment arrangement with the Commissioner. This changes the previous position being that directors would avoid personal liability if within the (then 14 days) notice period they entered into a repayment arrangement.
4. In light of the amendments, if directors are to escape personal liability, they may now only do one of the following within the 21 day notice period:
   1. Pay the full amount outstanding to the Commissioner; or
   2. Appoint a Voluntary Administrator or Liquidator to the company.
5. Whilst a director will not escape personal liability if a repayment arrangement is entered into, the amendments provide that if a repayment arrangement is entered into during the 21 day period and the arrangement is strictly complied with, the Commissioner will be precluded from taking enforcement action against the director whilst that payment arrangement is adhered to.
6. In the event that proceedings are commenced by the Commissioner, the defence available to directors under the previous section 222AOJ(2) of the Act (that is, the director did not take part in the management of the company because of illness or some other good reason) is more difficult to prove as an additional requirement has been imposed.
7. In addition to the two existing requirements, a director relying on that defence must now also prove that it would have been unreasonable to expect him or her to have taken part in the management of the company at that time.
8. The elements that must therefore now be proved by the director are as follows: –
   1. he or she did not take part in the management of the company (at any time after the PAYG amounts in question were withheld); and
   2. he or she did not take part: –
   1. because of illness; or
   2. for some other good reason; and
   3. it would have been unreasonable to expect him or her to have taken part in the management of the company at that time.

This amendment, which is now encompassed in section 269-35(2) of Schedule 1 of the Taxation Administration Act 1953 (Cth.), overcomes drafting problems with the existing regime and a number of decisions where the Commissioner has been unsuccessful where a director has relied upon the section 222AOJ(2) defence in circumstances of, by way of example, extended illness, the illness of a spouse or a bad case of tinea!

The Amendment Act has confirmed the authority of Deputy Commissioner of Taxation v. Dick [2007] NSWCA 190 and provides that section 1318 of the Corporations Act 2001 (Cth.) does not apply to an obligation or liability of a director in relation to a Director Penalty Notice.  The court therefore has no discretion to relieve a director from liability under section 1318 in relation to a Director Penalty Notice.