This update concerns a significant new risk for tax agents, which is fortunately able to be minimised by implementing a single, simple measure.

Most tax agents are aware that, on 30 June 2012, new laws came into force with regard to director penalty notices. This legislation (the Tax Laws Amendment (2012 Measures No. 2) Act 2012 (Cth.)) contained a few widely publicised “big ticket items”, including:

1. personal liability of directors for unpaid superannuation; and
2. permanent personal liability of directors where unremitted PAYG or unpaid superannuation remains unreported for three months or more.

There was a flurry of bulletins, newsletters and articles about these changes. Tax agents were sternly warned that, if they delayed in lodging returns, and the delay caused the returns to be lodged more than three months late, they might find themselves on the receiving end of a law suit from a disgruntled company director.

Meanwhile, however, another change of concern to tax agents received much less attention. The purpose of this bulletin is to draw attention to that other change. The amendment concerned is set out in section 269-52(2) of Schedule 1 to the Taxation Administration Act 1953 (Cth.). It provides that, if the ATO has sent a director penalty notice to a company director, it may also send a copy to the director’s tax agent.

Although this seems innocuous, this new provision has the potential to cost a tax agent hundreds of thousands of dollars. To highlight how, we give the example of “Dennis”, the director of “ABC Pty. Limited”, a theoretical struggling small business:

1. ABC Pty. Limited was set up in 2004. Dennis was its sole director and secretary.
2. In 2006, Dennis moved house. He informed ASIC of the change of his company’s registered office address, however, due to oversight, he never informed ASIC that his own personal address (as a director of the company) had also changed.
3. ABC suffered a sharp decline in trading in 2010 and 2011, as a result of which Dennis was forced to divert PAYG withholdings to meet vital trading expenses such as payments to suppliers, rent, wages, and lease repayments on his Mercedes.
4. After a couple of years, the unremitted PAYG built up to $210,000. In July 2012, the ATO prepared a director penalty notice and posted it to Dennis’s ASIC-recorded (former) residential address. It also sent a copy to his tax agent, as permitted by the new legislation.
5. Dennis did not receive the director penalty notice, because he had moved house and forgotten to update his personal address with ASIC. His tax agent did receive the notice, but, for one reason or another, did not bring it to Dennis’s attention.
6. Consequently, Dennis never realised that a director penalty notice had been issued, and that the final deadline for him to avoid personal liability for ABC’s debt (by placing the company into liquidation or administration) was about to slip by.
7. In fact, the first thing Dennis knew about the ATO’s personal claim against him was when, several weeks later, the ATO served him with court documents claiming payment of $210,000 plus costs and interest in the District Court of New South Wales.
8. Dennis then sought legal advice and, through further enquiries, eventually discovered that his tax agent was sent a copy of the director penalty notice, but never brought it to his attention.
9. Consequently, on the advice of his lawyers, Dennis filed a cross-claim against the tax agent in the District Court proceedings. He argued that, if it were not for the tax agent’s negligent failure to advise him about the director penalty notice, he would have placed ABC into liquidation immediately upon becoming aware of the director penalty notice, and thereby avoided personal liability for the $210,000 debt.
10. That brings us to the present day. The main hearing in the District Court proceedings has occurred and the judge is expected to hand down a decision in the next couple of weeks. The tax agent is looking at one of three possible outcomes:
    1. The court may accept Dennis’s argument that the tax agent was at fault, order the tax agent to indemnify Dennis for the whole of the ATO debt, and require the tax agent to pay Dennis’s legal costs.
    2. The court may find that the tax agent’s negligence was partly responsible for Dennis’s failure to avoid liability for the company’s debt, and order the tax agent to indemnify Dennis for part of the ATO liability.
    3. In a “best case” scenario, the court may throw out Dennis’s case and order him to pay the tax agent’s costs. The tax agent will, in the meantime, have incurred costs in the order of $30,000 – $60,000, which he will be forced to chase Dennis to recover – assuming Dennis does not simply declare bankruptcy as a result of the ATO debt.

None of these outcomes is satisfactory for the tax agent, especially when all he would have needed to do to avoid the whole situation was to implement a system to ensure that all director penalty notices were immediately brought to the relevant director’s attention (and followed up in writing).

People in desperate circumstances are often quick to blame others for their misfortunes, and may leap at the opportunity to say “I was paying my accountants thousands of dollars a year. If they had done their job I would never have had to pay this debt.”

Furthermore, lawyers in search of a solution for their clients are often attracted to the prospect of laying all of the blame at the feet of a third party – particularly one with professional indemnity insurance.

In short, tax agents have a real potential to be targeted as a result of this new amendment to the legislation. It is vital that every tax agent has a system in place to ensure that, if a director penalty notice is received, it is immediately brought to the attention of the director concerned – preferably in a way that can be proven if there is ever a dispute.