In the matter of Deputy Commission of Taxation v Thomas Wilson [2018] NSWDC 302, the New South Wales District Court found against a company director for failing to comply with his duties. In doing so, Mahoney SC DCJ refused to mitigate on the basis of the director’s ‘difficult’ co-directors, asserting that there is no reprieve available to directors who fail to uphold their obligations.
In April 2015, Global Piling Contractors Pty Ltd was incorporated, with Mr Wilson, Mr Wheatley and Mrs Wheatley appointed as directors. Mr Wilson and Mr Wheatley each owned a 50% share in the company.
According to Mr Wilson, it was agreed at the time of incorporation that the directors were not employees of the company and thus would not receive salaries. Rather, they would draw money by way of dividends. In fact, the company was to have no employees, but would instead engage the services of contractors as required.
However, in 2015 the company withheld monies due to the Deputy Commissioner of Taxation on two occasions, before lodging Business Activity Statements which identified two amounts withheld for PAYG tax on employee salaries. The PAYG tax was never paid. Accordingly, in February 2016, Mr Wilson was issued with a Director Penalty Notice (DPN) for failing to remit PAYGW to the value of $111,798 to the ATO.
At trial, Mr Wilson submitted that from the time of incorporation until he received the DPN, he believed the company had systems in place to ensure it complied with its taxation obligations and remitted all amounts due to the ATO. He asserted that he thought those sums would be limited to GST and upon receiving the DPN, he did not understand that the amounts claimed were on account of taxes withheld by the company for wages paid to employees.
Moreover, Mr Wilson submitted that upon receiving the DPN, he phoned Mrs Wheatley who informed him that the amounts claimed in the DPN were on account of taxes withheld from wages paid to workers and not remitted to the ATO. Mr Wilson was also informed that Mr Wheatley had been hiring employees, rather than engaging contractors – a decision which he submitted he had not previously been made aware of. Further, Mr Wilson was informed that both Mr and Mrs Wheatley had also received a DPN and that ATB Partners would be engaged to formulate a payment plan with the ATO.
On 22 February 2016, at Mr Wilson’s request, a meeting of the company was held to discuss the outstanding taxation liability and the company’s ability to pay it. With no involvement in the day-to-day running of the company, and concerned that the company was insolvent, Mr Wilson was apprehensive about his exposure as a Director under the DPN. He subsequently moved a resolution that the company enter into voluntary administration. However, Mr and Mrs Wheatley contended that the company was simply experiencing a ‘temporary lack of liquidity’, and consequently dismissed the motion. They also rejected a secondary resolution by Mr Wilson that the directors convene a general meeting of the members of the company for the purpose of appointing a liquidator.
Mr Wilson subsequently sought legal advice on how to put the company into administration or cause the company to be wound up to avoid liability under the DPN. Mr Wilson was informed that he alone could not put the company into the administration, and that in order to avoid liability under the DPN, the company would need to pay its outstanding taxation liabilities. Mr Wilson was also advised that he could apply to the court for a winding up order but that it would be a difficult process and that by the time an application was heard in court, the time for compliance with the DPN would likely have expired.
In August 2016, Mr and Mrs Wheatley agreed to appoint an administrator, who the court subsequently appointed as a liquidator.
In September 2018, the matter was brought before Mahoney DCJ, with the Deputy Commissioner of Taxation alleging that pursuant to section 255-45 of the Taxation Administration Act, it had a prima facie entitlement to the debt due by virtue of an evidentiary certificate. However, Mr Wilson relied on the statutory defence under s 269-35. Accordingly, the court was required to determine whether Mr Wilson had taken “all steps which were reasonable, having regard to the circumstances of which the defendant, acting reasonably, knew or ought to have known, to ensure that the directors complied with the section.”
Having considered the test in Saunig, the court held that the Mr Wilson had failed to take all reasonable steps, concluding that he “failed to inform himself of the way in which the company was being managed and operated.” In doing so, Mahoney DCJ held that Mr Wilson ought to have known that the company was incurring a tax liability by way of PAYGW. His Honour also concluded that there were further steps available to Mr Wilson, including calling another meeting to persuade his co-directors to appoint an administrator or to have brought an application for leave to wind up the company. Mr Wilson was therefore ordered to pay the debt in the amount of $111,798 plus interest, pursuant to section 100 of the Civil Procedure Act 2005.
Ultimately, this case serves as a warning to other directors that they cannot claim ignorance to satisfy the objective test and absolve their duties as a director.
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