Directors will be personally liable
The Government has re-released legislation designed to make directors personally liable for any unpaid superannuation guarantee contributions.
The Tax Laws Amendment (2012 Measures No. 2) Bill 2012: Companies' non-compliance with PAYG withholding and superannuation guarantee obligations seeks to extend the current director penalty regime for unpaid PAYG. The draft legislation also aims to prevent companies engaging in phoenix activities, which involves liquidating a company with significant debts and transferring the assets of the company to a new corporate entity, generally at significantly less than market value. The new corporate entity then rises from the ashes to conduct the previous business with the same or similar directors and shareholders.
Importantly, directors will be liable for more than the mandatory 9% superannuation guarantee contribution. They will instead be liable for the superannuation guarantee charge (SGC), which is calculated as follows:
- 9% of each employee's total salary or wages (instead of just their ordinary time earnings) (shortfall amount); plus
- interest on the shortfall amount from the beginning of the quarter in which the contribution was required to be made (ie 1 January) until the later of the lodgement of a superannuation guarantee statement outlining the shortfall amount or the 28th day of the second month after the end of the relevant quarter (ie 28 May for the quarter ending 28 March); plus
- an administration fee for each individual employee currently set at $20 per quarter.
The SGC is not deductible and the Commissioner of Taxation has no discretion to remit all or part of the SGC. Employers cannot contract out of their superannuation guarantee obligations.
Power to recover unpaid SGC
The Bill gives the Commissioner power to issue a notice of unpaid liabilities and commence proceedings to recover that amount after 21 days. The amount will be recovered as a director penalty where superannuation guarantee contributions are unpaid and unreported for three months.
The benefit of the 21 day notice period is that it gives directors the opportunity to extinguish the director penalty by:
- paying the liability;
- causing the company to pay the liability;
- appointing an administrator; or
- commencing the winding up of the company.
If the outstanding superannuation guarantee contributions have not been paid within three months and the director places the company into liquidation or voluntary administration, the director will remain personally liable.
A new director will be liable for any unpaid superannuation guarantee contributions 30 days after they start as a director. Therefore, it will be important for all new directors to conduct a thorough due diligence of the company before they are appointed as a director to ensure they are aware of any potential personal liability for unpaid SGC.
Directors can defend being made personally liable if they can establish that:
- because of illness or another satisfactory reason they were not involved in the management of the company; or
- they took all reasonable steps to ensure that the directors complied with their obligations, or no such steps were available.
Insufficient company funds will not be sufficient to establish there were 'no reasonable steps' available.
The amended Bill provides an additional defence primarily designed to protect directors that engage contractors. This defence is available where the directors have formed a view with regard to their obligations to common law and deemed employees under the Superannuation Guarantee (Administration) Act 1992 and:
- the directors took reasonable care in reaching their view; and
- the view taken is reasonably arguable.
So the issues that will arise are: what is reasonable care and when is a view reasonably arguable?
In our view, where the directors have considered a representative sample of contractors and taken advice that confirms the contractors are likely to be contractors for superannuation law purposes, the directors will have taken reasonable care and will have an arguable position to support the approach adopted.
A director must raise a defence to personal liability within 60 days of receiving a notice from the Commissioner.
We recommend that directors should review the superannuation arrangements of their business and consider whether any changes to their current practices need to be made and in particular, whether cross indemnities from other directors are required.
In addition, consider undertaking a risk assessment of any contractors engaged and if in doubt, seek advice on the status of contractors for PAYG withholding tax and superannuation purposes. The Government has raised the bar on director penalties and accordingly, the consequences of getting it wrong.
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.