Deputy Commissioner of Taxation v Kliman

The Full Federal Court of Australia heard an appeal in *Deputy Commissioner of Taxation v Kliman*. The dispute concerned the Commissioner of Taxation's assessment of additional tax under section 226 of the *Income Tax Assessment Act 1936* (Cth) (the Act) against Mr Kliman, who was the sole director and shareholder of a company that had failed to remit its pay-as-you-earn (PAYE) tax liabilities. The Commissioner sought to recover these unpaid amounts from Mr Kliman personally, alleging he had failed to exercise reasonable diligence in the discharge of his duties as a director.

The central legal issue before the Court was whether Mr Kliman had taken all reasonable steps to ensure the company discharged its obligations to pay the PAYE tax amounts to the Commissioner. This required the Court to consider the scope of the director's duty of care and diligence in the context of statutory tax liabilities and the specific circumstances surrounding the company's financial difficulties and its failure to remit the collected tax.

The Court analysed the provisions of section 226 of the Act, which imposes personal liability on directors for a company's unpaid PAYE tax where the director has failed to exercise reasonable diligence. It was held that "reasonable diligence" requires a director to take all reasonable steps to ensure the company meets its obligations. This involves actively monitoring the company's financial position, understanding its tax liabilities, and taking appropriate action to ensure those liabilities are met. The Court found that Mr Kliman had not discharged this duty, as he had failed to take adequate steps to ensure the company's PAYE tax liabilities were paid, despite being aware of the company's financial distress and its accumulating tax debts.

The appeal was allowed, and the Commissioner's assessment of additional tax against Mr Kliman was upheld.