By Justin Byrne, Special Counsel and Hannah Byrne
The Government has passed legislation to make company directors personally liable for unpaid super contributions if the company fails to comply with its superannuation guarantee obligations.
The new legislation, applying from 30 June 2012, aims to deter company directors from engaging in fraudulent phoenix activity, and to better protect employees' superannuation entitlements.
Because these changes mean that inadvertent administrative errors could possibly result in the ATO commencing immediate recovery proceedings, company directors need to ensure they understand how these changes work in practice.
Here, special counsel Justin Byrne and solicitor Hannah Byrne explain the changes and how they will affect all company directors.
- The application of the director penalty regime has been expanded to include unpaid superannuation guarantee charges.
- The Commissioner of Taxation is now allowed to commence proceedings to recover director penalties (without first issuing a director penalty notice) three months after the due date, if the company debt remains unpaid and unreported after the three months passes.
- Where three months has passed after the due date for the company's liability, and it remains unpaid and unreported, the director's liability cannot be extinguished by placing the company into administration or beginning to wind it up.
- Where company directors personally obtain a PAYG credit for tax withheld by a company, the directors will effectively lose that credit (by way of becoming liable to pay PAYG withholding non-compliance tax) where the company fails to remit the PAYG withholding to the ATO.
The previous director penalty regime
The director penalty regime makes directors of companies that fail to comply with their obligation to pay amounts withheld under the PAYG withholding regime to the Commissioner personally liable for the amount that the company should have paid, by imposing a penalty.
Where a director is liable for a penalty, the Commissioner can issue a director penalty notice to recover the penalty. The Commissioner may then commence proceedings to recover the penalty 21 days after the notice is issued.
The new legislation expands a director's personal liability to also include the company's unpaid superannuation guarantee charge. It also allows the Commissioner to start proceedings to recover a director penalty, without first issuing a director penalty notice, where the liability remains unpaid and unreported three months after the due date.
A director's personal liability can be extinguished if any of the following occurs within the 21 day director penalty notice period:
- Payment of the debt
- Appointing an administrator to the company
- Beginning the winding up of the company
Under the new rules, where the relevant liability remains unpaid and unreported for three months or more, only payment of the liability will extinguish the director's liability.
Under the old rules, directors obtained a PAYG withholding credit for PAYG withholding tax withheld from wages or directors fees paid to directors. The credit was still available even where the PAYG withholding was never remitted to the ATO. The new rules will cancel the director's credit where this occurs by making the director liable for PAYG withholding non-compliance tax.
How will the director penalty regime extend to superannuation?
Under the existing superannuation guarantee scheme, employers are required to provide to employees a minimum of nine percent superannuation support in each financial year. If an employer fails to pay the appropriate amount of superannuation guarantee contributions on behalf of their employees, the outstanding amount is referred to as a superannuation guarantee shortfall. If an employer has a superannuation guarantee shortfall, a superannuation guarantee charge arises.
Under the new legislation, existing directors will be liable for a director penalty at the end of the lodgement day if the company has not lodged its superannuation guarantee statement and paid the corresponding guarantee charge by the end of that day.
So, for example, if the company fails to pay the relevant superannuation guarantee amount for the June quarter by the lodgement date (ie 28 August), its directors will be liable to a director penalty equal to the company's superannuation guarantee charge.
Accordingly, under the new legislation, the Commissioner can either:
- issue a director penalty notice and wait until the end of 21 days after issuing that notice before beginning proceedings to recover the penalty; or
- begin proceedings to recover a director penalty, without issuing a director penalty notice, where the liability remains unpaid and unreported three months after the due date.
Our top tips for company directors
- Those intending to become directors should ensure that, as part of the due diligence process, they consider the company's PAYG and superannuation guarantee obligations. A new director will become liable to a director penalty if, after 30 days of joining the company, the company still has not discharged its obligations.
- Companies should review their PAYG and superannuation compliance procedures to ensure there are no risks identified, such as incorrectly classifying employees as contractors or incorrectly calculating superannuation on overtime (which should be included in 'ordinary time earnings' in some circumstances).
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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.