In a recent legal ruling, the Australian Federal Court has clarified the limitations faced by directors of insolvent companies in challenging the company’s PAYG (Pay As You Go) liability. The case, involving RIC Admin Pty Ltd (Company), centred on whether a director could contest a director’s penalty notice through an affidavit and potentially reduce or revoke the estimated debt.
Background and Decision
The case stemmed from the Commissioner issuing an Estimate for PAYG to RIC Admin Pty Ltd, which went uncontested by the company. Subsequently, the Commissioner issued a director’s penalty notice to the appellant, the company’s sole director, for the unpaid amount. Following the company’s insolvency and liquidation, the director attempted to challenge the debt through an affidavit, aiming to revoke it under section 268-40 of the Taxation Administration Act 1993.
Court’s Ruling
The Federal Court examined two critical questions: whether a director’s affidavit in penalty notice proceedings could reduce the estimate and if the scenario differed when the company was in liquidation.
On the first question, the Court concluded that a director’s affidavit could not reduce the estimate, as the liability under penalty proceedings was distinct from the company’s liability under the estimate.
Regarding the second question, while opinions varied, the majority held that a director in a liquidated company could make an affidavit. Still, it stressed that it’s the liquidator’s prerogative to decide whether to submit it to challenge the estimate.
Key Takeaways
- Affidavit Limitations: A director cannot rely on an affidavit in proceedings related to their liability under a director’s penalty notice to contest the estimate issued by the Commissioner of Taxation. This ruling underscores the separation between a director’s liability and the company’s tax obligations.
- Liquidation Implications: When a company is liquidated, a director may challenge the estimate by making an affidavit or statutory declaration. However, it’s crucial to note that the decision to present such a challenge lies with the supervising entity, the liquidator. Directors cannot unilaterally contest the estimate once the company is liquidated.
Our Perspective
This ruling clarifies the procedure for contesting tax estimates and highlights the importance of timely action by companies served with such notices. It underscores the need for directors to understand their limitations in challenging tax liabilities, especially in insolvency.
In essence, while directors may seek to challenge tax estimates, they must do so under legal procedures and with consideration for the company’s status, mainly if it’s in liquidation. The decision ultimately rests with the appointed supervising entity, emphasizing the structured approach required in such circumstances.
If you or a business you work with find yourself in a position of a PAYG liability, reach out to us for support.
Disclaimer
This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to RRI Advisory’s clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.