Director found personally liable

Dimitrios Christis v Deputy Commissioner of Taxation [2011] NSWCA 310

District Court Proceedings

In August 2010, in the District Court of New South Wales, the Commissioner of Taxation (Commissioner) sought to recover $159,114.37 from Dimitrios Christis (DC), a sole director of Woronora Pty Ltd (W Pty Ltd), as per s 220AOC(1) of the Income Tax Assessment Act 1936 (Cth) (ITTA). The section allows the Commissioner to recover outstanding moneys withheld from employees in accordance with section 12-35 of Sch 1 of the Taxation Administration Act 1953 (Cth) (TAA). The amounts withheld dated from June 2006 and February 2008. The Court found that DC, as the director of W Pty Ltd, had failed to take steps provided in s 222AOB of the ITTA, and that DC was not able to rely on any defences in the ITTA as DC took no reasonable steps to ensure that W Pty Ltd complied with the payment obligations.

Facts

DC and Mr John Apostolopoulos (JA) formed a partnership in November 2005 and operated a café. DC was to manage the café and bank the takings of the café each day. Their relationship deteriorated by February 2006 and in November 2006, DC opened a new account and deposited money in there for the purpose of paying rent and other liabilities. From July 2006, JA claimed that DC had not provided any account keeping information. On 7 February 2007, JA and his brother told DC that they changed the locks to the café and wrote a letter to inform him that his services as a manager were terminated. In September and October, DC was asked to provide accounting books, but both requests were ignored. On 4 June 2008 the partnership was dissolved by W Pty Ltd in the Equity Division Court and a receiver and manager were to be appointed.

Court of Appeal Proceedings

Two arguments were made to the Court of Appeal by DC. Firstly, that the partnership had been terminated on 7 February 2007 when the locks to the café were changed and therefore, JA was not authorised to act on behalf of the partnership or withhold money from employee wages, and secondly that DC did not commit a taxation offence. The Court said that the letter dated the 7 February 2007 only terminated DC’s role as a manager, not the partnership and that subsequent requests by JA in September and October for information indicated that the partnership was still existent. In relation to the second argument the Court said that proceedings were not brought to prosecute DC for a taxation offence, but to recover the amount due as a civil penalty under the ITAA.

According to the Court, one further argument could have been made; that is that a partnership could end when certain events occurred such as retirement, as per their partnership agreement, but it was unlikely that this this would have been made out. The Court concluded that as the partnership had not been dissolved prior to June 2008, each partner was jointly and severally liable to pay the amounts withheld to the Commissioner.

Lessons for Directors

Even though this case relates to a partnership dispute, the provisions of the ITTA regarding the recovery of moneys withheld from employees, is a matter every Director should be aware of. Failure to remit these moneys to the ATO could result in a Director being personally liable for such amounts even if the Director being pursued by the ATO is no longer involved in the running of the business. In this regard see also the not-for-profit case of Deputy Commissioner of Taxation v Dick [2007] NSWCA 190.