House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Deputy Prime Minister and Treasurer, the Hon Wayne Swan MP)

Chapter 7 - Penalty notice validation

Outline of chapter

7.1 Schedule 7 to this Bill will ensure the ongoing validity of certain director penalty notices, notwithstanding the New South Wales Court of Appeal (NSWCA) decision in Soong v Deputy Commissioner of Taxation [2011] NSWCA 26 ( Soong ).

Context of amendments

7.2 A director penalty notice is a notice issued by the Commissioner of Taxation (Commissioner) to the director of a company which has failed to send an amount of money it has withheld, being amounts of pay as you go withholding, to the Commissioner.

7.3 Former Part VI of the Income Tax Assessment Act 1936 (ITAA 1936) contained provisions which authorised the Commissioner to issue director penalty notices to the directors of companies. These provisions were effective until 30 June 2010, as former Part VI of the ITAA 1936 was repealed and new director penalty notice provisions were inserted into Part 4-15 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) with effect from 1 July 2010.

7.4 Under former section 222AOE of the ITAA 1936, the Commissioner was required in a director penalty notice to inform the relevant director that they were personally liable to pay a penalty equal to their company's unpaid amount. However, the director penalty notice was also required to state that this penalty would be remitted if, at the end of 14 days after the notice was given:

•

the liability had been discharged;

•

a payment agreement relating to the liability had been entered into;

•

the company was under administration; or

•

the company was being wound up.

7.5 If the director did not comply with one of these penalty remission conditions by the end of 14 days after the director penalty notice was given, the Commissioner would then be entitled to commence recovery proceedings against them.

7.6 On 10 December 2007, a two judge majority of three judges of the NSWCA in Deputy Commissioner of Taxation v Meredith [2007] NSWCA 354 ( Meredith ) considered (the now former) section 222AOE, and determined that a director penalty notice is considered to be 'given' to a director on the date it was sent by post. As such, the director's 14-day notice period would commence from the date on which the director penalty notice was posted by the Commissioner.

7.7 In reliance on Meredith , the Commissioner proceeded to issue director penalty notices which explicitly stated that the director had 14 days from the date of postage (which was displayed on the director penalty notice) in which to act so as to have the penalty remitted. The Commissioner continued this practice until 30 June 2010, when former Part VI of the ITAA 1936 was repealed with effect from 1 July 2010.

7.8 However, on 25 February 2011 a full bench of five judges of the NSWCA in Soong unanimously overturned the earlier decision in Meredith , and determined that a director penalty notice that was issued under former section 222AOE of the ITAA 1936 is considered to be 'given' to a director on the date the director penalty notice was delivered, instead of the date on which the director penalty notice was sent by post. As such, the director's 14-day notice period commenced from the date on which the director penalty notice was delivered.

7.9 The Commissioner sought special leave to appeal the Soong decision in the High Court, however this was denied on 12 August 2011.

7.10 The effect of this decision by the High Court is that approximately 17,000 director penalty notices which were issued by the Commissioner between 10 December 2007 and 30 June 2010 (inclusive) did not advise the recipients of the correct period of time in which they could act to have their penalty remitted. As such, these director penalty notices may be invalid.

7.11 These amendments will ensure that the understanding and operation of the law at the time these director penalty notices were issued (in reliance on Meredith ) is maintained. As such, the validity of these director penalty notices will not be able to be questioned merely because of the NSWCA's later construction (in Soong ) of the former director penalty notice provisions.

7.12 The validity of those director penalty notices issued by the Commissioner on or after 1 July 2010 is not in doubt as a result of the decision in Soong . This is because the new director penalty notice provisions (specifically section 269-25 in Schedule 1 to the TAA 1953) explicitly provide that a director penalty notice is to be taken as 'given' either when the Commissioner leaves it with, or posts it to, the director penalty notice recipient. Section 269-25 also excludes the operation of section 29 of the Acts Interpretation Act 1901 , so as to confirm that a director penalty notice cannot be taken as 'given' only from the time at which it is delivered.

Summary of new law

7.13 These amendments ensure that all director penalty notices issued by the Commissioner between 10 December 2007 and 30 June 2010, inclusive, will not be invalid because of the NSWCA decision in Soong .

Comparison of key features of new law and current law

Detailed explanation of new law

Effect of the Soong decision

7.14 In overturning Meredith , the NSWCA's subsequent (and unanimous) finding in Soong clarified that a director penalty notice issued pursuant to former section 222AOE of the ITAA 1936 should have been taken as 'given' at the time the director penalty notice was delivered to the director. This meant that a director should have had 14 days, from the date the director penalty notice was delivered, to act to achieve penalty remission.

7.15 After the Commissioner was denied special leave to appeal the Soong decision on 12 August 2011, the validity of all those director penalty notices issued between 10 December 2007 (the date of the Meredith judgment) and 30 June 2010 (the last day section 222AOE had effect) could be brought into question. This is because these director penalty notices did not advise the directors of the correct period of time in which they could act to have their penalty remitted.

Ensuring penalty notices are not made invalid

7.16 These amendments will ensure that the operation of the law, as understood at the time of issuing these director penalty notices, is maintained. As such, the validity of these director penalty notices will not be able to be questioned merely because of the NSWCA's later construction (in Soong ) of the former director penalty notice provisions.

7.17 To achieve this, any director penalty notice issued between 10 December 2007 and 30 June 2010 (inclusive) will be treated as having been 'given' at the time the Commissioner sent it by pre-paid post. [Schedule 7, item 1 ]

Example 7.24

On 1 June 2009 the Commissioner posted director penalty notices to both Garry and Ruth, the two directors of Tootison Pty Ltd. Garry's director penalty notice was delivered to his place of residence on 3 June 2009, and he received it on 4 June 2009. However, Ruth's director penalty notice was delivered to her place of residence and received by her on 5 June 2009. On 8 June 2009, Garry appointed an administrator to Tootison Pty Ltd. The Commissioner acknowledged that Garry acted in sufficient time to achieve remission of the penalty for which Garry and Ruth would otherwise have remained personally liable.

The director penalty notices are to be treated as having been given to both Garry and Ruth at the time of postage. Since Garry caused the company to comply with a condition for penalty remission within 14 days of the director penalty notice being posted, the remission of the penalty for both directors cannot be called into question.

Example 7.25

On 1 February 2010 the Commissioner posted a director penalty notice to Erin, the sole director of Willowed Pty Ltd. The director penalty notice was delivered to Erin's place of business on 4 February 2010, and she received it on the same day. Erin made no effort to comply with the director penalty notice. After the passage of several weeks, the Commissioner contended that Erin did not act in time, and subsequently initiated recovery proceedings against her for the penalty.

This director penalty notice is to be treated as having been given to Erin at the time of postage. Since Erin did not satisfy a condition for penalty remission within 14 days of the director penalty notice being posted, neither the Commissioner's efforts to recover this money, nor the actual collection of this penalty, can be called into question.

7.18 As a consequence, these amendments also ensure that penalty remission is only available to those directors who complied with a penalty remission condition within 14 days of the director penalty notice having been sent by pre-paid post (and not within 14 days of the director penalty notice having been delivered).

Example 7.26

On 1 March 2010 the Commissioner posted a director penalty notice to Meg, the sole director of Aphaele Pty Ltd. The director penalty notice was delivered to Meg's place of residence on 3 March 2010, and she received it on the same day. On 16 March 2010 Meg appointed an administrator to Aphaele Pty Ltd. The Commissioner later contended that Meg did not act in time, and subsequently initiated recovery proceedings against her for the penalty.

This director penalty notice is to be treated as having been given to Meg at the time of postage. Since Meg did not satisfy a condition for penalty remission within 14 days of the director penalty notice being posted, neither the Commissioner's efforts to recover this money, nor the actual collection of this penalty, can be called into question.

It is irrelevant that Meg would have satisfied a condition for penalty remission in time had the 14-day period commenced from when the director penalty notice was delivered to her place of residence.

Application and transitional provisions

7.19 These amendments apply from 10 December 2007, the date on which the NSWCA gave judgment in Meredith .

7.20 This application date is necessary to ensure all those director penalty notices which were issued in reliance on Meredith , and pursuant to (the now former) section 222AOE of the ITAA 1936, cannot be regarded as being invalid because of the later NSWCA decision in Soong .

7.21 These amendments affect all director penalty notice recipients who were issued a director penalty notice between 10 December 2007 and 30 June 2010, inclusive.

7.22 Technically, these amendments will have an adverse impact on those directors who would otherwise seek to challenge the validity of their director penalty notices in light of the later Soong construction.

7.23 Substantively though, no taxpayers will be adversely affected because these amendments merely restore the precedential view on the issue during this period (as enunciated in Meredith ) - that is, that a director had 14 days from the date the director penalty notice was sent by post in which to act to achieve penalty remission.

7.24 However, these amendments do not affect the rights or liabilities of parties to a proceeding which may be determined by a court on or before the commencement of these amendments, insofar as these rights or liabilities were affected by a director penalty notice issued between 10 December 2007 and 30 June 2010, inclusive.