Publications / Taxation
The personal liability of company directors for withholding of Pay-As-You-Go (PAYG) and Superannuation Guarantee (SG) amounts from employee wages will be increased under a proposed change to the law.
On 5 July 2011, the Federal Treasury released an Exposure Draft of a bill to strengthen the operation of the director penalty notice regime, following the announcement of the change in the federal budget on 10 May 2011.
The changes are intended to protect workers’ entitlements to compulsory employer superannuation contributions and to address ‘phoenix’ activity involving companies. However, the changes will apply more broadly, creating an increased personal liability risk for all directors of companies with paid employees, or contractors who principally provide their labour for whom SG obligations therefore apply.
Importantly, these changes can also expose directors to personal liability where the company has under-reported PAYG or SG withholding amounts because it has taken the view that a person is a contractor and not an employee (or a contractor for whom SG obligations apply), if that view is later proven incorrect.
The changes will take effect once the bill is enacted, expected to be before the end of 2011.
Key aspects of the changes
Under the proposed changes:
- the director penalty regime will be extended to make directors personally liable for their company’s unpaid superannuation guarantee amounts (in addition to unpaid PAYG amounts)
- the Australian Taxation Office (ATO) will be allowed to immediately commence recovery action if the company’s liability remains unpaid and unreported three months after the due day
- after a company’s liability remains unpaid and unreported for more than three months, a director’s personal liability can only be extinguished by payment of the debt or penalty (placing the company into liquidation will not be sufficient)
- the ATO will have the discretion to prevent directors and their associates, from accessing the PAYG withholding credits on their own salaries if the company has an outstanding PAYG liability, and
- a new director can become personally liable for the company’s outstanding PAYG and SG liabilities after 14 days from the time they commence as director of the company.
Extending liability for superannuation guarantee amounts
Under the proposed changes, directors can be made personally liable for the company’s unpaid SG amounts. A director can become personally liable from the SG lodgement date for each quarter, even if the company fails to lodge a quarterly report as required.
There are limited defences to the personal liability, if an individual director can prove that they were not involved in the management of the company for good reasons (for example, because of illness or extended leave), or that they took all reasonable steps to ensure that the directors complied with their obligations (for example, placing the company into liquidation).
A director must raise their defence within 60 days of receiving a director penalty notice. It is important to note that it is not a defence for a director to argue that the company had insufficient funds to pay the PAYG withholding amount or the SG amount.
Reduction of directors’ personal PAYG credits
Under the proposed changes, where a company’s PAYG withholding liability is unpaid, the ATO will have the discretion to reduce a director’s PAYG credits for amounts withheld by the company from the directors’ own salary, directly increasing their personal tax liability.
The ATO will also have discretion to reduce the PAYG credits of a director’s associate (e.g. spouse) where the associate knew, or could reasonably be expected to have known, that the company failed to pay its PAYG liability to the ATO.
Recovery process for director penalties
The ATO can now immediately commence recovery and impose penalties on a director where an unpaid liability remains unreported three months after the due date, on the basis of the ATO’s estimate of the unreported liability.
Importantly, once the three months have elapsed, the ATO is no longer required to provide 21 days notice to the director before initiating proceedings, and the director’s personal liability can only be satisfied by paying the penalty or the underlying liability – placing the company into liquidation will be insufficient.
Implications for directors
Whilst the changes are targeted at directors engaging in ‘phoenix’ activities, the ATO’s new powers reaffirm the importance of directors being aware of their company’s employee and contractor tax obligations. Boards may particularly wish to review their company’s superannuation obligations in respect of contractors and ensure processes are in place for the payment of SG obligations and for the withholding and remission to the ATO of PAYG amounts.
As always, advice should be sought and action taken urgently upon the receipt of a director penalty notice.
Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.