The decision on 19 October 2006 by the New South Wales Supreme Court, Court of Appeal in the case of Eaton & Ors. V. DFC of T is a clear indication of the rigours of tax law and ATO notices, especially notices under section 222 AOE of the law.
The facts in this case are simple. The directors' company failed to remit group taxes to the ATO between 1 December 2000 and 30 June 2001. On 11 July 2002, notices under section 222 AOE were sent by the ATO to the directors. The directors failed to get the company to do any one of the following within 14 days as required by law:
- pay the amount withheld to the ATO;
- make an agreement with ATO with respect of the amount;
- appoint an administrator; or
- begin to be wound up.
As a result the directors became personally liable for an amount equal to the liability of the company. A further letter from the ATO was sent to the directors on 2 July 2003 and on 17 July 2003 an administrator was appointed to the company and on 20 September 2003 the creditors of the company entered into a deed of company arrangement.
There were three arguments put forward by the directors which were all rejected by the court.
- Firstly, it was argued that since the directors were liable for "an amount equal to the unpaid amount of the company's liability" entering into a deed of company arrangement releases the company from all its debts and hence there is no unpaid amount of company's liability. The court took the position that the unpaid amount was an unpaid amount on the due date and not otherwise. Therefore the directors were liable.
- Secondly the directors argued that since under the deed of company arrangement an amount is "paid or applied" to discharge the liability of the company, a liability parallel to that of the directors, the liability of the directors is also discharged. The court found that "paid or applied' related to discharge by the company of its liability to the Commissioner of Taxation and not the payment to the company under the deed of company arrangement. Further it was said that "discharge" does not mean extinction of liability by operation of law pursuant to the deed of company arrangement, but the release by the fulfilment, performance or execution of the obligation.
- Thirdly, the argument put forward by the directors that judgements against more than one director was an abuse of process was also rejected.
It follows from the decision that each director can be made liable for the penalty. The key to avoiding liability by the directors is to get the company to take one of the above four steps within 14 days of the notice.
This short article is of general nature and emphasises the need for prompt action on receiving letters and section 222 notices from the ATO. If you receive ATO communication promptly seek professional advice and review of the specific circumstances of yourself and your company.
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