The other secret service - directors' penalty notice held to be served when the director didn't receive it

"He was always late on principle, his principle being that punctuality is the thief of time."1 "Procrastination is the thief of time"2

In times of economic difficulty, those in control of corporate vehicles need to be especially concerned about personal exposure to company liabilities. In particular directors liability for unpaid withholding tax is a particular concern. Recent statements from the Commissioner of Taxation confirm that the Tax Office will not be shying away from using powers to enforce personal liability against directors, even where the director receives no notice of the ATO\'s claim. This is based on the decision of the NSW Court of Appeal in Meredith which held that a director penalty notice can be served on a director even though the director can prove that the notice never arrived.

The Facts

Between 1 March 2002 and 21 June 2004, Merro Holdings Pty Limited withheld tax on behalf of its employees, but failed to remit it to the Australian Taxation Office. On 27 July 2004 the Australian Taxation Office sent a Director's Penalty Notice to the address of the director, Lynette Anne Meredith, recorded in the records of the Australian Securities and Investments Commission. The director sought to establish that the DPN had not been received. The ATO argued that this did not matter, as it was only necessary to establish that the notice had been posted, not received.

The Legislation

Division 9 of Part VI of the Income Tax Assessment Act imposes personal liability on directors for withholding taxation amounts which are not remitted by a company to the Australian Taxation Office.

Critically, prior to recovering the penalty, the ATO must give notice to the director (usually called a Director's Penalty Notice ("DPN")). The notice can be sent to the address of the director recorded with the Australian Securities and Investments Commission: 222AOF. If the notice is complied with, section 222AOG prescribes that the penalty imposed on the director by 222AOC is remitted.

The provisions for service of the Directors Penalty Notice set out in 222AOF also refer to the provisions of the Acts Interpretation Act 1901 (Cth) regarding service in the ordinary course of post.

The Cases

There have been a number of cases which have considered the personal liability imposed by the DPN regime. It must be said that the majority of these have upheld the strictness upon directors of the requirements of the legislation.

Service of Director Penalty Notices

A large number of cases have considered whether a DPN has been properly served on a director. It is well established that it is not sufficient for a director to prove that he or she did not receive the notice. Rather, in order to challenge service of a DPN it was necessary to establish that it was not delivered.

Short of proving the postman was robbed, directors normally can only lead enough evidence to hope to persuade the Court that it is highly unlikely that a DPN sent in the post actually arrived. The decision in Meredith means that even this will not be enough.

DCT v. Meredith [2007] NSWCA 354

In Meredith, service was once again an issue. The Deputy Commissioner of Taxation put on evidence that she had delivered a DPN by placing it in a pre-paid envelope and putting the envelope into the post, addressed to the director at her address obtained from an ASIC search of the Company.

The director gave evidence regarding her system of collection and dealing with mail, and her knowledge of the importance of a DPN, all of which, together with her evidence that she had not received it, formed the basis for a submission that the DPN had not in fact been delivered.

In the District Court, Judge Quirk accepted the evidence of Ms Meredith, finding that whilst the evidence was not as detailed as in other cases, it was established that it was unlikely that mail sent to the residential premises of the director would go missing or be taken by another occupant. The District Court judge found therefore that the evidence of non-delivery displaced the presumption in the Acts Interpretation Act (which provides for deemed service of a document on the fourth working day after posting). Accordingly, judgment was entered for the director in the District Court.

Court of Appeal

On appeal, the DCT's main argument was that the effect of section 222AOF(1) of the Income Tax Assessment Act was that the service of the DPN was completed when the notice was put in the post addressed to the Respondent at the address obtained from the ASIC records.

All of the judges agreed that the issue in this case had not been squarely raised in any prior decision. By majority (Justices Ipp and Basten agreeing, Justice Giles dissenting) the appeal was allowed. The majority was satisfied there was a clear intention of Parliament that service could be effected by placing the DPN into the post (regardless of whether or not it arrives). "The risk of the notice going astray in the post has been treated as tolerable, in order to effect the policy underlying the scheme" (per Basten JA at [75])

ATO Decision Impact Statement

Earlier this year, the Australian Taxation Office published a Decision Impact Statement regarding the decision in Meredith. Apart from noting the "favourable" outcome, the statement confirms that as far as the ATO is concerned, "the Commissioner will calculate the time for compliance with the DPN from the date on which the DPN was posted, irrespective of whether or when the DPN was received or delivered." The decion was also referred to in a speech by the Commissioner to the AICD in September.

It can be seen that the position of the ATO is strict. Notwithstanding clear evidence that a person has not received a DPN (for reasons completely outside his or her control, such as destruction of mail in the post box to which it was placed by the ATO officer, the loss of mail within the Australian Postal system or even the robbery of a postman) the ATO will still regard time as ticking, for the purposes of any opportunity to avoid the director's personal liability.


The effect of the decision in Meredith is harsh, in respect of a scheme that is already punitive. Advisers need to ensure directors are fully aware of the risks of personal liability attaching to a company's liability for withholding taxes. They need to be told what to do with a DPN, should one be received, but warned that they may not have be able to avoid personal liability, if the notice does not turn up. Of course it also remains true that early attention to tax liabilities, along with other creditor claims, is the only way to avoid directors being at risk personally for debts of a company. Putting off a company's financial problems may shift those problems to the directors and place personal assets in jeopardy.

1 Oscar Wilde, The Picture of Dorian Gray
2 Edward Young, Night Thoughts Vol 1, 393

Stephen Mullette