Following the 2011/2012 Federal Budget announcement that directors will be made personally liable for any unpaid superannuation guarantee contributions, Treasury has released the Tax Laws Amendment (2011 Measures No. 7) Bill 2011 (Bill).

The legislation extends the current director penalty regime for unpaid PAYG. Whilst the announcement from Bill Shorten MP on 5 July 2011 highlights the need to prevent companies engaging in phoenix activities, the legislation will have a much broader impact.

Phoenix activities involve 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. While the proposed legislation is designed to target phoenix schemes, the provisions could have serious ramifications for companies that engage independent contractors (refer to our previous update).

Power to recover unpaid SGC

The draft legislation gives the Commissioner power to immediately commence recovery without notice of any outstanding superannuation guarantee contributions from directors personally. The amount will be recovered as a director penalty where superannuation guarantee contributions are unpaid and unreported for three months. The Commissioner will also have the right to issue a notice of unpaid liabilities and commence proceedings to recover that amount after 21 days.

The benefit of the 21 day notice period is that it gives the director 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 of being due and payable and the director places the company into liquidation or voluntary administration, the director will remain personally liable.

The usual process is for the Commissioner to issue assessments to the company and for the company to either pay the superannuation guarantee charge or object to the assessment. Making directors personally liable for the superannuation guarantee charge and allowing the Commissioner to commence proceedings immediately will impact on the ability of a company to object to the imposition of the superannuation guarantee charge because of the financial pressure being placed on directors.

Retrospective application

If the legislation is enacted in its current form, it will apply not only to superannuation guarantee obligations that arise from 1 July 2011, but will also apply to unpaid superannuation guarantee contributions as at 1 July 2011. As the Commissioner's practice is to recover unpaid superannuation guarantee amounts (plus an administration fee and interest) for the current year and previous four years, directors could potentially be liable for up to five years of the superannuation guarantee charge. This is a significant retrospective penalty to impose on directors. 


Directors may be able to 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 they complied with their obligations, or no such steps were available.

Insufficient company funds will not be sufficient to establish that 'no reasonable steps' were available.

Directors must raise a defence to personal liability within 60 days of receiving a notice from the Commissioner.

New directors

A new director will be liable for any unpaid superannuation guarantee contributions 14 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.

What should you do?

We recommend that directors review their superannuation arrangements for employees and contractors, assess whether there is a potential liability and take steps to mitigate the risk of directors being made personally liable for any unpaid superannuation guarantee contributions.