In November 2016 the Queensland Court of Appeal handed down a decision which gives directors some guidance about what is required to make out a defence to a director penalty notice (DPN) issued by the Australian Taxation Office (ATO).
In Shaw v DCT; Rablin v DCT  QCA 275, two directors of a company appealed an order for summary judgment made against them and in favour of the Deputy Commissioner of Taxation (DCT) by a single judge in the Queensland Supreme Court.
The DCT had previously issued a DPN to each director for unpaid pay-as-you-go withholding tax, and then applied for summary judgment against the directors when they failed to pay the amount specified in the DPN. The directors argued they had a defence to the DPN, but the Supreme Court held otherwise and granted the DCT’s application for summary judgment.
The directors appealed the Supreme Court’s decision to the Court of Appeal.
What was the defence?
Under section 269-35(2) of Schedule 1 to the Taxation Administration Act 1953 (Cth), a director may not be liable to pay the penalty in a DPN where:
- the director took all reasonable steps to ensure one of the following things happened:
- the director caused the company to comply with its tax obligations;
- the director caused a voluntary administrator to be appointed to the company;
- the director caused the company to begin to be wound up; or
- there were no reasonable steps the director could have taken to ensure that any of the abovementioned things happened.
What did the Court of Appeal say?
Shaw and Rablin pleaded section 269-35(2) in their defence to the DCT’s application for summary judgment against them. They also both filed affidavit evidence outlining what they had done to meet the elements of the defence and why, which was to pursue refinancing of the company’s debts.
The Supreme Court said that what Shaw and Rablin had done was not enough to make out the defence but the Court of Appeal disagreed (albeit for the purposes of a summary judgment application, which requires evidence of some reasonable defence, and not necessarily for a final hearing which would require a greater level of proof).
The Court of Appeal confirmed that a director does not need to do all of the things in section 269-35(2) at once to bring a successful defence to a DPN. A director can choose one of the things alone, or multiple things in combination, or one thing after another.
So, for example, if the only available option is for the director to cause the company to go into voluntary administration and the director is taking all reasonable steps to ensure this happens, the director is not acting unreasonably by doing nothing to cause the company to pay its tax. Similarly, a director who is taking all reasonable steps to cause the company to pay its tax is not obliged to put a company into voluntary administration or liquidation.
The Court of Appeal found that Shaw and Rablin were not obliged to pursue the options of liquidation or voluntary administration while they were taking all reasonable steps to enable the company to pay the tax owed to the DCT.
To argue a defence under section 269-35(2) directors need to do at least one of the things listed in that section and take all reasonable steps to do it. As to ‘what steps are reasonable?’, that will depend on the ‘constellation’ of relevant primary facts.
Proof that nothing could be done at various times during the period the tax was owed would not establish that nothing could have been done at other times, and proof that a director took all reasonable steps at various times would not establish that they took all reasonable steps throughout.
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