Eaton and Ors v Deputy Commissioner of Taxation
Document type: Decision Impact Statement
Venue: Supreme Court (40911; 40912 and 40913 of 2004)
Judgment date: 19 October 2006
Date published: 2 July 2007

Summary of decision:
The appellant taxpayers argued that a Deed of Company Arrangement extinguishes a director penalty liability for the purposes of section 222AOH of the Income Tax Assessment Act 1936 (ITAA 1936).

Overview of facts:
1. The Applicants were directors of Lofeze P/L ("the Company"). 2. On 11 July 2002, the ATO issued a director penalty notice ("DPN") pursuant to section 222AOE of the ITAA 1936 to each director in relation to unremitted group taxes between December 2000 - June 2001. 3. The notice required the directors to do one of four things within 14 days of receipt: namely, pay the amount; enter into an agreement under section 222ALA ITAA 1936; put the company into administration; or put the company into liquidation. 4. The directors did not comply with the notice by the due date (26 July 2002) and as a consequence, the Commissioner was able to take recovery action for the penalty amount. 5. On 17 July 2003, that is, after the expiration of the date specified in the DPN, the company entered into voluntary administration and subsequently a Deed of Company Arrangement was approved by creditors. The Deed of Company Arrangement provided that a payment of $51,000 to all creditors would release the company from all of its debts. 6. The amount of $51,000 was less than the amount payable under the DPN. | 1. The Applicants were directors of Lofeze P/L ("the Company"). 2. On 11 July 2002, the ATO issued a director penalty notice ("DPN") pursuant to section 222AOE of the ITAA 1936 to each director in relation to unremitted group taxes between December 2000 - June 2001. 3. The notice required the directors to do one of four things within 14 days of receipt: namely, pay the amount; enter into an agreement under section 222ALA ITAA 1936; put the company into administration; or put the company into liquidation. 4. The directors did not comply with the notice by the due date (26 July 2002) and as a consequence, the Commissioner was able to take recovery action for the penalty amount. 5. On 17 July 2003, that is, after the expiration of the date specified in the DPN, the company entered into voluntary administration and subsequently a Deed of Company Arrangement was approved by creditors. The Deed of Company Arrangement provided that a payment of $51,000 to all creditors would release the company from all of its debts. 6. The amount of $51,000 was less than the amount payable under the DPN. | Issues decided by the court or tribunal | 1. Whether a Deed of Company Arrangement extinguishes the DPN penalty? | Answer: No | The Court rejected the contention that a payment under the terms of the Deed of Company Arrangement had the effect of discharging the DPN penalty. | Section 222AOH of the ITAA 36 refers to amounts being "paid" or "applied" to the Commissioner. If an amount is paid or applied towards a DPN liability, then any payments made can be used to reduce or discharge the liability of any director who is sued for the same liability. Here, the $51,000 was paid under the terms of the Deed of Company Arrangement. There was no evidence that any amount was paid to the Deputy Commissioner of Taxation (DCT). In addition, the Court found that a discharge must mean a release, or extinction by the fulfilment, performance, execution of an obligation, duty, function etc: Commissioner of Taxation v Orica Limited [1998] 94 CLR 500. | 2. Whether the District Court has jurisdiction to hear tax recovery matters? | Answer: Yes | The Court referred to the NSW Court of Appeal's decision in Forsyth v DCT which had already dealt with the jurisdiction issue. | 3. Whether the DCT was entitled to enter judgement against each of three directors in the same amount or whether it was so unfair as to preclude the DCT from enforcing any such judgement. | The Court stated that the DCT was entitled to enter judgement against each of three directors and therefore there was no abuse of process in the DCT obtaining a separate judgment against each of three directors for the same amount, as it enabled the DCT to proceed against any one or more of the directors. This reflected the legislature's intention that directors be jointly and severally liable for penalties in these circumstances.

Issues decided:
1. Whether a Deed of Company Arrangement extinguishes the DPN penalty?: Answer: No The Court rejected the contention that a payment under the terms of the Deed of Company Arrangement had the effect of discharging the DPN penalty. Section 222AOH of the ITAA 36 refers to amounts being "paid" or "applied" to the Commissioner. If an amount is paid or applied towards a DPN liability, then any payments made can be used to reduce or discharge the liability of any director who is sued for the same liability. Here, the $51,000 was paid under the terms of the Deed of Company Arrangement. There was no evidence that any amount was paid to the Deputy Commissioner of Taxation (DCT). In addition, the Court found that a discharge must mean a release, or extinction by the fulfilment, performance, execution of an obligation, duty, function etc: Commissioner of Taxation v Orica Limited [1998] 94 CLR 500. | 2. Whether the District Court has jurisdiction to hear tax recovery matters?: Answer: Yes The Court referred to the NSW Court of Appeal's decision in Forsyth v DCT which had already dealt with the jurisdiction issue. | 3. Whether the DCT was entitled to enter judgement against each of three directors in the same amount or whether it was so unfair as to preclude the DCT from enforcing any such judgement.: The Court stated that the DCT was entitled to enter judgement against each of three directors and therefore there was no abuse of process in the DCT obtaining a separate judgment against each of three directors for the same amount, as it enabled the DCT to proceed against any one or more of the directors. This reflected the legislature's intention that directors be jointly and severally liable for penalties in these circumstances.

ATO view of decision:
The decision confirms the Commissioner's view that a Deed of Company Arrangement cannot be used as a mechanism for directors to avoid the operation of the director penalty provisions contained in Part VI, Division 9, Subdivision A of the Income Tax Assessment Act 1936 and that the DCT is able to enter judgment against more than one director for the same amount.

Administrative treatment:
None

Legislative references: District Court Act 1973 44(1)(a) 83A Income Tax Assessment Act 1936 160M(3) Part VI, Division 9, Subdivision A 222ALA 222AOB 222AOC(1) 222AOG 222AOH 222AOI
Case references: Forsyth v Deputy Commissioner of Taxation (2002) 62 NSWLR 132 2005 ATC 4025 58 ATR 179 Stewart v DCT (1997) 38 ATR 26 DCT v Harrington (Walmsley DCJ) (No.9568/01) 1 October 2003 unreported Commissioner v Orica Limited [1998] 94 CLR 500 98 ATC 4494 39 ATR 66
Subject references: Whether director liability under 222AOC of the ITAA extinguished by Deed of Company Arrangement Jurisdiction of the District Court of New South Wales Whether it is unfair to enforce judgment on the basis that it had been obtained against each of three directors for the same amount.