Have scant regard for a DPN at your peril
Where companies fail to remit to the Commissioner of Taxation tax withheld from employees, under provisions of the Taxation Administration Act 1953 (Cth) (TAA), directors may be issued with a Director Penalty Notice (DPN).
The TAA may also impose obligations on directors of a withholding company, who must cause the company to pay withheld money to the Australian Tax Office (ATO).
Company director Peter Panayi, the subject of such a notice, failed to meet its requirements. He was taken to court by the Commissioner, who on 24 June 2016 was awarded a judgement of almost $370,000. On 6 November 2016 the ATO notified Mr Panayi he was personally liable for a penalty equal to this sum.
We shall see now, the result of his decision to appeal this judgement.
Readers unfamiliar with the function of DPNs, or unaware of updates and their effects, should review Macks Advisory’s references at the end of this article.
The director’s defence
Mr Panayi denied he’d been appointed or acted as a director of the company at any relevant time.
He relied on the defence provided by s269-35(1) of the Act, saying he was unaware of his appointment as a director, and in any case illness made it unreasonable to expect him to be involved in management of the company at any relevant time. The “illness”, he claimed, was manifested in high blood pressure, high sugar levels, high cholesterol and poor eyesight caused by cataracts.
He further maintained his penalty liability had been remitted when members of the company resolved that it be wound up voluntarily. However, success with this argument depended on application of s269-30 in its unamended form before 30 June 2012.
On 6 November 2012 the ATO informed Mr Panayi of his liability for a penalty of $369, 904.86, and on 26 November 2012, as a “director”, he notified Australian Securities Investments Commission (ASIC) that at a meeting on that day it was resolved the company should be wound up.
At the initial hearing of the matter, the Court ruled that Mr Panayi had indeed been appointed and acted as a director of the company for the entire period 1 January 2011 to (“at least”) November 2012, and a notice filed with ASIC informing the Commission that he’d been appointed director and secretary of the company on 1 January 2011 was prima facie evidence of that fact - Corporations Act 2001 (Cth), s1274B(2).
The trial judge said evidence also showed Mr Panayi signed minutes of company meetings as “director”, “held himself out to others” as a director, and also signed a number of documents relative to the company’s management acknowledging that he was a director right up to the time of the winding-up.
Sickness and remission issues
However, the court had heard nothing to suggest that at any time was Mr Panayi so ill it would have been “unreasonable” to expect him to take part in managing the company. There had been bare reference in a general practitioner’s letter to diabetes and atrophy in one eye, but no company record of any sick leave, and it was clear he was working full time on many tasks requiring physical wellbeing and good eyesight - for example, truck repairs.
The primary judge also rejected Mr Panayi’s argument that the unamended form of s269-30 continued to apply so as to remit his liability to pay a penalty.
Before 30 June 2012 s269-30 provided for remission of a penalty prior to the end of a DPN’s period:
- If a director ceased being a director under the relevant obligation of s269-15 before the DPN’s issue under s269-25
- Or within 21 days after issue of the notice.
Subsections 269-15(1) and (2) of Schedule 1 to the TAA provide (before and after the 2012 amendment) that:
- Company directors (within the meaning of the Corporations Act 2001) must (from time to time) on or after the initial day of a DPN, cause a company to comply with its obligation.
- They (from time to time) continue to be under this obligation until (a) the company complies with its obligation or (b) an administrator is appointed under s436A, s436B, or 436C of the Corporations Ac 2001 or, (c) the company begins to be wound up (within the meaning of that Act).
The relevant “obligation” of a company referred to in subsection (1) is the obligation to pay withheld tax amounts to the Commissioner.
Applying the decision of the Western Australian Court of Appeal in Roche v Deputy Commissioner of Taxation [2015] WASCA 196 at [56]-[58], the primary judge, in Mr Panayi’s case, ruled that the amended form of s269-30 applied to his penalty. This was because he didn’t stop, as a director of the company, having a relevant obligation under s269-15 until after 30 June 2012.
Accordingly applying that section as amended, meant subsection (1) did not enable remission of Mr Panayi’s penalty because the Commissioner received no notification under s6-150 – within three months after the due date for payment – of any withheld tax money.
So to Mr Panayi’s appeal
In his appeal to the NSW Supreme Court a very dim view was taken of Mr Panayi’s insistence that the trial judge had erred in virtually every aspect of her finding in favour of the Commissioner.
The effect of the appeal, according to the panel of three judges who heard it, was to confront them with “what amounted to a substantially new case presented without notice by counsel for the appellant”, requiring them to conduct what amounted to a retrial.
Furthermore, the written outline of submissions supplied to the court on Mr Panayi’s behalf was both “exiguous” (very small in size or amount), and in virtually every instance, new, involving matters not heard by the original trial judge. In total, the submissions only “occupied two and a half generously spaced pages”.
The appeal judges said filing anonymous submissions electronically the day before an appeal, or “supplying a large bundle of material on the morning of a hearing, represents prima facie a serious breach of the obligations owed by a litigant and his/her legal practitioners under Civil Procedure Act 2005 (NSW), s56(3), (4)”.
The phrase “prima facie”, however, allows for the possibility of an explanation that might excuse a litigant or a legal practitioner.
The judges said that if, therefore, the Court had been of the view there was any unfairness to the respondent to the appeal (in this case the Commissioner of Taxation) then it was likely they would have adopted a different course both in relation to the way in which the appeal was heard, and in the exercise of discretion as to costs.
But it was “rapidly apparent new points being advanced on behalf of Mr Panayi lacked substance”.
The appellant’s failings
Apart from other failings, it was noted Mr Panayi’s written submissions made no mention of amendments to the TAA by Tax Laws Amendment (2012 Measures No 2) Act 2012 (Cth) (the Amending Act) that applied to the penalties incurred by Mr Panayi in 2011.
Nonetheless oral submissions made on his behalf contended that it was unfair of the primary judge to have relied on the Amending Act. It was asserted to be “unfair” because Her Honour had treated the 2012 changes as retroactive, and “the 2012 amendment was never pleaded in the [Commissioner’s] statement of claim”.
But the appeal judges declared there was “nothing to that part of the complaint” – and added: “The company at all times was obliged to pay amounts of withheld tax. Mr Panayi, who for the purposes of resolving this ground of appeal, must be taken to have been a director in accordance with the finding of the primary judge and was in breach of his obligation to cause the company to pay the tax withheld.
“The Act imposed upon him a penalty for such a breach and it was for the Commissioner to allege material facts in suing for the money. It was not for him to allege in his statement of claim that any possible defence was not made out. Still less was the Commissioner obliged to deny in his claim that the Amending Act did not apply.”
The Court found that “it was for Mr Panayi to state defences on which he relied”. They included in this case (although only in his amended defence) that the Amending Act did not apply, and the company had commenced being wound up within 21 days of the giving of the director penalty notice.”
But the appeal judges ruled that “in any event the amended defence was served more than a year before the trial.”
They pointed out Mr Panayi’s appeal crystallised a legal issue which applied to the penalty on which the Commissioner sued – an issue determined by the primary judge after full argument. “There was no suggestion of any surprise. The submission based on the Commissioner’s pleading must be rejected.”
The lesson to be learned
Mr Panayi lost the initial trial, having as a result being ordered to pay a penalty of $369,904.86 as well as his own and the Commissioner of Taxation’s costs. Now he had lost his appeal against this decision, also with costs ordered against him.
Anyone issued with a DPN should take expert advice on how most effectively to respond to it and should then follow that advice to the letter.
To have, as did Mr Panayi, scant regard for a DPN and the consequences of mishandling it, is to invite trouble of possible life-changing significance.
Readers may care to go to http://macksadvisory.muchmedia.com.au/ and type “dpn” in the Query Bar search field, in order to read the news articles which may also be useful.
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