On 29 November 2012, the first wave of Australian company directors became personally liable for unpaid superannuation under the extended director penalty regime.

Director penalty regime

The Commonwealth of Australia recently amended the director penalty regime, originally introduced in Australia in 1993 to assist the Commissioner of Taxation in recovering company liabilities.

Under Australian tax law, companies have an obligation to withhold amounts from certain payments they make, such as wages to employees and fees to directors. Under the director penalty regime, directors who fail to cause a company to comply with its obligations are personally liable for the amount that the company should have paid. However, the Commissioner of Taxation must first issue the director a written notice about the penalty, and then must wait 21 days before commencing proceedings to recover the director penalty. Directors are able to extinguish their personal liability by placing the company into voluntary administration or liquidation during the 21-day notice period and before the Commissioner is able to commence proceedings to recover the penalty.

Extended director penalty regime

On 29 June 2012, changes were made to Australian taxation law aiming to reduce the scope of fraudulent 'phoenix' activity (in which a director intentionally accumulate debts, liquidates the company to avoid paying its liabilities, then has the underlying business 'rise again,' operating through another, debt-free corporate entity) and avoidance of employee entitlement payments.

These changes were achieved by:

  • Extending the director penalty regime and the estimates regime to apply to unpaid superannuation payments
  • Ensuring that directors cannot discharge their director penalty liabilities by placing their companies into administration or liquidation when withholding amounts or when superannuation remains unpaid and unreported three months after the due date
  • In some instances, making directors and their associates liable for withholding non compliance tax (effectively reducing credit entitlements) when their companies fail to pay amounts withheld to the Commissioner.

The new legislation provides the Commissioner with a wider ambit to pursue directors for breaches of their obligations. Extending the director penalty regime to unpaid superannuation better secures employees' entitlements, and, ideally, deters directors from fraudulent phoenix activities and improves the regulatory environment for compliant taxpayers.

Under the new regime, the 21-day notice period has been dispensed with when the underlying liability remains unpaid and unreported three months after the due date. Effectively, directors will become automatically liable, and that liability cannot be remitted by placing the company into administration or liquidation. These changes came into force on 30 June 2012, and June quarter superannuation reporting fell due on 29 August 2012: consequently, the first wave of personal liability took effect on 29 November 2012.

The result in practice

Directors taking up new appointments at Australian companies need to be increasingly vigilant. New directors will become liable for director penalties if an obligation giving rise to a director penalty exists, and, 30 days after the date of the director's appointment, the director is still under that obligation. New directors will not be subject to the restricted remission options until three months after they become a director of the company, no matter how long the company has been liable for the debt.

If you are planning on becoming a director of an Australian entity, it is critical that proper due diligence be undertaken regarding the company's tax affairs and employee entitlement compliance and that professional advice is sought quickly about any areas of concern.

This article was first published in Global Insight, our e-newsletter which includes news, views and analysis from our Global Restructuring Group. Please click here to view the latest issue of Global Insight.

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