On 13 October 2011, amendments were introduced to make directors personally liable for unpaid superannuation contributions where the company does not comply with its superannuation guarantee obligations.
Directors have an opportunity before the bill is passed to ensure companies are paying the correct amount of superannuation. Once the bill is passed, directors may become personally liable for future shortfalls.
The new law
The amendments aim to protect employee superannuation entitlements from 'phoenix activity', where companies are wound up before paying employee entitlements and tax obligations.
However, the new law is broad enough to make directors personally liable where there is a superannuation shortfall because of innocent mistakes (for example, where superannuation is not correctly calculated on overtime or payments to certain types of contractors).
The ATO will enforce the new law through the existing 'director penalty notice' regime, where a director is issued with an administrative penalty equal to the unpaid tax or superannuation guarantee shortfall amount.
While the legislation contains defences for directors who would otherwise become personally liable for a penalty, the Courts have interpreted these defences narrowly.
Risk areas for superannuation guarantee charge assessments - payments for overtime and payments to contractors
Minimum superannuation contributions are calculated on 'ordinary time earnings'. The common understanding is that payments for overtime are not included.
However, the meaning of 'ordinary time earnings' will include salary or wages for 'overtime' in certain circumstances. In Quest Personnel Temping Pty Ltd v Commissioner of Taxation [2002] FCA 85, the Federal Court concluded that hours regularly worked above the minimum weekly requirements were ordinary time earnings, despite being classified as 'overtime' by the employer.
We have experience of the ATO raising superannuation guarantee shortfall assessments based on the difference between the minimum hours (as stated in the award or employment contract) and actual hours worked.
Directors should check their company's compliance if employees are regularly paid for working more than minimum hours.
Payments made to contractors are another common audit target.
If a company 'contracts' with a person under a contract that is primarily for the supply of labour and the relationship is really one of employment, the company may also be required to make superannuation contributions on top of the payments to the contractor.
There is a significant volume of case law on whether an agreement is an employment relationship. A common mistake made by companies is attempting to classify the relationship based on the name of the agreement – a document titled 'services agreement' may still evidence an employment relationship.
Another compliance risk is where a company engages in a genuine contractual relationship, but the contractor is caught by the extended definition of 'employee' under the legislation. The extended definition includes a contractor working under a contract that is wholly or principally for the labour of the contractor.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.