Revised version of ATO’s Director Penalty draft legislation released

Yesterday the Assistant Treasurer released draft legislation which will introduce revisions to the existing director penalty regime – although not as severe as originally sought. In November last year an earlier version of the legislation had been before Parliament, but was withdrawn by the Government in light of some strong criticisms that it had gone too far – see my post from last year here.

Last year’s version of the proposed legislation would have allowed the ATO to issue proceedings against directors personally for certain company tax liabilities without first issuing a DPN (Directors Penalty Notice), once the liability had remained unpaid and unreported for more than 3 months after the due date. In addition, the tax liabilities for which a director could become personally liable was to to be extended from only unpaid PAYG, as before, to also include superannuation guarantee liabilities.

The latter change has been retained in the new version of the draft legislation, however the former has not. DPNs are still required to be issued to directors before the ATO may issue proceedings against directors personally to recover the relevant company tax liaibilities. Another change to the draft Bill is intended to ensure that new directors have time to familiarise themselves with corporate accounts before being held personally liable for corporate debts. There is also proposed a new defence for directors liable for penalties for superannuation debts where, broadly, they reasonably thought the worker was a contractor and not an employee.

The latest exposure draft of this legislation is again intended to amend the tax law to better protect workers’ entitlements to superannuation and strengthen director obligations, but in a more measured manner. It is also intended to assist in countering phoenix behaviour. The main aspects of the amendments are –

  • extending directors’ potential personal liability for company tax debts to unpaid superannuation guarantee amounts;
  • ensuring that directors cannot have their director penalties remitted by placing their company into administration or liquidation when unpaid PAYG withholding or superannuation guarantee amounts remain unpaid for 3 months; and
  • restricting access to PAYG withholding credits for directors and their associates where the company has failed to pay withheld amounts to the ATO.

You can read the Assistant Treasurer’s press release here and the announcement on the Treasury website here. Note that on the latter webpage, there are links to the exposure draft bill and explanatory memorandum, as well as a “summary document” which sets out industry concerns raised in relation to the previous version of the Bill, and what Treasury’s response has been on each point in the new version. Treasury has called for public consultation and submissions, which are due on 2 May 2012.

Deputy Commissioner of Taxation appeals Kassem and Secatore v COT [2012] FCA 152

Earlier this month I posted my analysis and commentary regarding the Federal Court’s interesting decision on third party preferences in Kassem and Secatore v Commissioner of Taxation [2012] FCA 152. You can read my post here.

Unsurprisingly perhaps, the Deputy Commissioner of Taxation has indeed lodged a notice of appeal last week on 20 March 2012. As I mentioned, this case does not involve a large sum of money, but does involve arguments the Deputy Commissioner would want to test further. It will be most interesting to see how the Full Federal Court treats this case on appeal, and the issues it raises. If the argument is run on appeal, as I would expect, I am particularly interested to see the Court’s attitude to the ATO unilaterally reallocating payments received in respect of one tax liability to apply them to a different tax liability – for the Superannuation Guarantee Charge – and then relying upon that reallocation to argue the payments could not be preferences. For a fuller discussion of the case and this issue, see my earlier post, link above.

COT v National Skin Institute (Aust) PL – Full Federal Court rules on the Commissioner’s practice re affidavits in support of winding up applications

This winding up application had been brought in the Federal Court. Although it was unopposed, it was referred up to the Full Court pursuant to s 20(1A) of the Federal Court of Australia Act 1976 (Cth). This occurred because an issue of general application had arisen concerning the admissibility of three paragraphs in the Commissioner’s affidavit in support of the winding up application. They are standard paragraphs, as many of you will recognise, that the Commissioner has been using for years in such affidavits, as to the sum demanded in the statutory demand remaining due to the Commonwealth and payable by the defendant company.

The Commissioner sought to have the issue resolved for the benefit of future applications and also in relation to past winding up applications. In an unrelated case heard in December last year by Rares J, his Honour had there held that those three paragraphs were inadmissible. One can imagine the scale of the problem this  issue might have become for the Commissioner, given how many wind up applications the Commissioner instigates each year.

The three paragraphs in question were paragraphs 3, 4 and 8 of the affidavit in support, which had been sworn by an officer of the Commissioner. They were as follows –

“3.  The following facts are within my own personal knowledge and from my perusal of records and information in the possession of the Plaintiff to which I have access and with which I am familiar in my capacity as an officer of the Australian Taxation Office.

4.  On 1 June 2011 the Defendant was indebted to the Plaintiff in the sum of $400,690.50 which sum was then due by the Defendant to the Commonwealth of Australia, payable by the Defendant to the Commissioner of Taxation, and recoverable by the Plaintiff under and in pursuance of the provisions of the Taxation Administration Act 1953….

8.  At the date of affirming this affidavit, the sum demanded of $400,690.50 remains due to the Commonwealth and is payable by the Defendant to the Plaintiff.”

Before their Honours Finn, Gordon and Murphy JJ, it was argued that those paragraphs were inadmissible as they infringed the hearsay rule in s 59 of the Evidence Act 1995 (Cth) because:

  • paragraph 3 did not state the information the deponent accessed, and
  • in paragraphs 4 and 8, the deponent’s statement was mere assertion and did not state the source of her knowledge.

It was submitted that s 459Q(c) of the Corporations Act 2001 (Cth) (the Act) required the Commissioner to adduce admissible evidence to “prove” each element of the case including as to his standing as a creditor of the Company.

Regulation 5.4 of the Federal Court (Corporations) Rules 2000 also prescribes what is required of an affidavit in support of a winding up application. Their Honours made several points about regulation 5.4, one of which was that given the relationship between s 459Q and r 5.4 , the provisions need to be read together [at 13]. They observed that s 459Q requires that the deponent verifies  that the debt or total of the debts is due and payable by the company and complies with the Rules, while r. 5.4 requires that the deponent state whether, and if so to what extent, the debt or debts is still due and payable by the company at the date of making the affidavit.

Their Honours then reviewed the authorities and the legislative context of s 459Q, which was part of the reforms introduced in June 1993 by the Corporate Law Reform Act 1992 (Cth). They concluded that what is required is formal affirmation, and not proof or substantiation [at 14-20]. This accords with the approach taken by Hayne J in AZED Developments Pty Ltd v Frederick & Co Ltd (in liq) (1994) 14 ACSR 54 at 46, in the context of s 459E of the Act, where his Honour said that the statutory scheme plainly indicates an intention that the verification required by the Act and Rules is different to and less than a requirement to prove or demonstrate the debt by good evidence [at 22].

Their Honours made a couple of interesting points towards the end of their judgment, including that –

  • Under s 467A of the Act the Court may grant a winding up application notwithstanding non-compliance with s 459Q if the Company has not suffered substantial injustice. In other words, their Honours said, the parliamentary drafters of the Corporations Act accepted that compliance with s 459Q was required but recognised that non-compliance would not necessarily lead to the dismissal of the application [at 25];
  • Even if the paragraphs in dispute were inadmissible, which the Full Court found they were not, the Registrar would still have been entitled to consider them. This is because where a matter is unopposed, a judge or Registrar is at liberty to take evidence into consideration which is neither irrelevant nor prohibited by an absolute rule of law, notwithstanding that it could be objected to by an interested party, were the party present, on the ground or ground of privilege or other rule of evidence: Re Lilley, deceased [1953] VLR 98 at 101 [at 26].

Their Honours ordered that the Company be wound up in insolvency. The judgment is not long, and may be read here (full name Deputy Commissioner of Taxation v National Skin Institute (Aust) Pty Ltd [2012] FCAFC 2).

To conclude on an irrelevant but mildly amusing note, I would like to quote from Rare J’s judgment in December 2011 mentioned above where, in considering certain provisions of the Taxation Administration Act 1953 (Cth), his Honour reveals some perhaps long-felt frustration with the manner in which legislation is often amended –

“6.  The unfortunate Byzantine modern tendency of Commonwealth Parliamentary drafters to include amendments to legislation that have a series of letters after them makes the explanation of these provisions more difficult and hard to comprehend. Re-enactment of legislation with appropriate renumbering of provisions such as s 8AAZJ would simplify the comprehensibility and explanation of legislation. The absurd use of such lettering was also found in the criminal cartel provisions in ss 44ZZRF and 47ZZRG of the Trade Practices Act 1974 (Cth) that was misleadingly retitled, but not comprehensibly structured, as the Consumer and Competition Act 2010 (Cth). These are the central provisions that will have to be explained to juries, using two numbers and four letters, each time the section is mentioned in argument either to the judge or jury.”