Directors — even honest directors — who incur personal liabilities for a company's tax obligations have to pay in the end. The Corporations Act discretions are no help under the tax law. A recent case is a warning to directors, Deputy Commissioner of Taxation v Dick.
Julian Smith and Robert Green
Summary — Directors need to ensure PAYG compliance
Directors must ensure their companies comply with their taxation
obligations. If the companies don't pay, then the directors may face
personal penalties including having to pay the tax on account of the
company's PAYG obligations. In a recent case, even an honest director
had to pay.
Additionally, and most interestingly, the case offers clear guidance on
the interaction of these tax laws with company law. In short, directors
cannot rely on the possible relief under section 1318 of the
Corporations Act 2001 (Cwth) to avoid tax liabilities.
The case is
Deputy Commissioner of Taxation v Dick
The facts of the case
The relevant facts of the dispute were:
Mr Dick was the director of a company that failed to remit PAYG
deductions to the ATO during the period June 2002 to March 2003. The
company owed $146,793 in PAYG tax.
If a company does not pay PAYG instalments, then the amount of those
instalments is imposed on the directors as a personal liability.
The Deputy Commissioner of Taxation (
DCT) issued three separate recovery notices on Mr Dick, as a
director the company, in relation to the company's failure to remit
Mr Dick did not cause the company to remit the PAYG instalments after
receipt of the notices.
As a result of this failure, the DCT commenced proceedings in the
District Court against Mr Dick to recover unpaid directors' penalties
Mr Dick first argued unsuccessfully that he had a defence under the
ITAA36 because he had not participated in the management of the
company during the relevant period. However his alternative argument,
that he should be granted the court's discretionary relief under
section 1318 of the Corporations Act, was successful at trial. Mr Dick
submitted that he had acted honestly, and that having regard to all
the circumstances he ought fairly be excused from liability. The
relevant circumstances included the fact that as of 6 January 2003, Mr
Dick was excluded from management of the company by its chairman, and
that Mr Dick's involvement in the company was more administrative than
managerial. Also relevant was the fact that Mr Dick was "conned" by
the new chairman of the company that the chairman would deal with the
notices and the fact that since the new chairman became the majority
shareholder, Mr Dick received no further remuneration for his
Consequently, the lower court granted relief to Mr Dick under section
1318 of the Corporations Act — so Mr Dick was not obliged to pay
unpaid director's penalties of $146,793.
However, the DCT appealed to the New South Wales Court of Appeal who
overruled the lower court, removed the relief and required Mr Dick to
pay the tax.
What is the discretionary relief?
The Corporation Act allows a Court to grant relief from liability to
various persons, (including directors) if, in a civil proceeding
brought against them:
they have acted honestly; and
in the circumstances, they ought fairly to be excused from liability.
The relief is available for a range of acts committed by a person. In
this case the relevant acts were Mr Dick's "default" or a "breach of
duty" in not making sure that the company paid the PAYG instalments.
What did the Court on Appeal say?
There were two questions for the Court of Appeal to answer:
Does section 1318 of the Corporations Act give a Court the discretion
to relieve a director of liability for proceedings issued under tax
legislation? (in this case, Divisions 8 and 9 of the ITAA36); and
If the answer to the first question is "yes", then: Should the Court
apply this discretion in favour of Mr Dick?
All members of the court answered the first question "No" — they
held that section 1318 of the Corporations Act cannot apply to
liabilities arising under Divisions 8 and 9 of the ITAA36. Therefore,
the second question did not need to be answered.
However, the reasons the judges gave for their first answer were not
Santow JA held that Divisions 8 and 9 of the ITAA36 are exhaustive in
respect of available defences — leaving no room for section 1318
of the Corporations Act to apply. He added that but for this point, he
would have considered that the relief under the Corporations Act could
have applied to liabilities under Divisions 8 and 9 of the ITAA36.
Basten JA took the view that Divisions 8 and 9 of the ITAA36 and
section 1318 of the Corporations Act could not operate together, and
that the former should prevail.
Spigelman CJ went much further deciding that section 1318 was only
ever intended to cover corporations law purposes, whether under
statute or the general law.
Accordingly, the Court of Appeal allowed the appeal and entered
judgment for the DCT.
For more information, please contact Maddocks on 03 9288 0555 or 02
8223 4100 and ask for a member of the Maddocks Corporate and Commercial
 NSWCA 190