Making directors personally liable

Directors will be made personally liable for any unpaid superannuation guarantee contributions under an extension to the director penalty regime introduced by the Tax Laws Amendment (2011 Measures No. 7) Bill 2011 (Bill). The Bill has not been passed as yet, but has been referred to the House Economics Committee for review and assessment. The House of Representatives next sit on 31 October 2011. We will keep you updated on the progress of the legislation.

The Bill extends the current director penalty regime for unpaid PAYG and 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 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 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.

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 is likely to 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.


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

In our view, it will be difficult for a director to establish that one of the narrow defences above is available. With remote access through mobile phones and laptops increasingly prevalent, arguably a director will need to be offline because of illness or another satisfactory reason to establish they were not involved in the management of the company. There is no guidance on what will constitute another ‘satisfactory reason’ – perhaps where a director is being denied access to company records because of a dispute and the director has taken all reasonable steps to resolve the dispute and gain access to company records will be sufficient.

Similarly, it is difficult to envisage a scenario in the usual course where a company has failed to comply with its superannuation obligations despite a director having taken all reasonable steps to ensure the company complies with its obligations, particularly since financial strife will not be sufficient. For example, if an employer fails to make the quarterly superannuation guarantee contributions, arguably the business should have appropriate checks and balances to identify and remedy any errors that occur.

However, where this defence could apply is where a company engages independent contractors that the Commissioner subsequently determines are deemed employees for superannuation law purposes. For example, if the directors have received legal advice and after proper consideration, form the view that their contractors do not fall within the deeming provisions in the superannuation law, it should be open to the directors to argue that they have taken all reasonable steps to comply with their obligations.        

Will new directors be liable?

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.

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.