Overview

The Government has recently passed legislation expanding and strengthening the direct penalty regime applicable to company directors. The amendments to the legislation make directors personally liable for unpaid superannuation contributions in addition to unpaid Pay As You Go (PAYG) withholding tax obligations. The legislation contains a number of provisions to which directors of companies will have to have particular regard because of the personal liability they may incur.

Whilst the aim of the legislation is to better protect workers’ entitlements to superannuation and strengthen director obligations (particularly in relation to “phoenix” activity), a risk to directors is that administrative errors may give rise to personal liability for directors.

Under the previous law, directors could be liable to penalties where the company withheld amounts from payments under the PAYG provisions (including salary and wage payments to employees) but failed to remit those amounts to the Australian Taxation Office (ATO). The ATO could issue a director penalty notice for a penalty equal to the amount withheld but not remitted. However, proceedings could not be commenced to recover the penalty until 21 days after the notice was issued and a director could extinguish his or her liability if, before the end of that period, any of the following occurred:

  • the company remitted the withheld amount to the ATO
  • the company entered voluntary administration, or
  • the company began to be wound up.  

What are the effects of the new provisions?

The new provisions bring about three substantial changes.

Firstly, the legislation now provides that existing directors will be personally liable for their company’s unpaid contributions known as “superannuation guarantee” amounts at the end of the lodgement day (for a newly appointed director the liability does not arise until 30 days after he or she becomes a director, to give the new director time to investigate the company’s affairs). For the purposes of these provisions, the lodgement day will be the day that the company is required to lodge its superannuation guarantee statement whether or not it has lodged that statement. Therefore the penalty regime cannot be avoided by simply failing to lodge the superannuation guarantee statement as required. The following example in the Explanatory Memorandum to the amending bill shows how this will work:

Kevin and Ash are directors of Kash Pty Ltd. Aaron is employed by Kash Pty Ltd from 1 January 2013. During the January to March quarter of the 2012-13 income year, Kash Pty Ltd failed to pay any superannuation guarantee amounts to Aaron’s superannuation fund.

As there is a superannuation guarantee shortfall, Kash Pty Ltd is required to report that shortfall in a superannuation guarantee statement to the Commissioner by 28 May 2013. However, Kash Pty Ltd does not report its shortfall by this date.

Therefore on 28 May 2013, Kevin and Ash are liable for director penalties for the value of the superannuation guarantee charge.

It should be noted that the Commissioner may estimate a superannuation guarantee charge without making an assessment. The directors will be liable for the amount of the estimate if the company does not pay the amount of the estimate by the end of the day on which the notice of the estimate was served on the company.

Secondly, when PAYG withholding or superannuation guarantee amounts remain unpaid and unreported three months after the due date, directors can no longer discharge their director penalties by placing their company into administration or liquidation (for a newly appointed director these restricted discharge provisions do not apply until 3 months’ after the appointment). This means that directors cannot simply wait until they receive a penalty notice from the Commissioner before taking steps to place the company into administration or liquidation. Effectively they only have 3 months after the due date for payment to take such action in order to avoid liability. The following example in the Explanatory Memorandum to the amending bill shows how this will work:

Kerry and Claire are directors of Tardy Co, which is required to pay amounts withheld under the PAYG withholding provisions to the Commissioner on a quarterly basis. During the January to March quarter in the 2013-14 income year, Tardy Co withholds $4,000 from payments made to its employees and directors.

Tardy Co fails to pay or report any of the withheld amounts to the Commissioner by the due day (21 April 2014). From that day Kerry and Claire are liable to a director penalty for the amount of the company’s unpaid PAYG withholding liabilities.

By 21 July 2014 (3 months after the liability for a director penalty arose), Kerry and Claire have not remitted their director penalties. The only way that they can now discharge their penalties is by causing the company to pay the amounts withheld or personally paying those amounts.

Thirdly, in certain cases directors and their associates will be personally liable to PAYG withholding non-compliance tax where the company has failed to pay amounts withheld to the ATO and the individual is entitled to a credit for amounts withheld by that company during the income year. This is to overcome the problem of a company not remitting PAYG but the director claiming a credit in their own income tax return for the amount required to be withheld but not remitted. The amount of tax payable by the director is the lesser of:

  • the total amounts withheld from payments made to the individual by the company in the individual’s income year (i.e. the extent that the credit is attributable to amounts withheld from payments made by the company of which the individual was a director, and
  • the company’s PAYG withholding liability for payments made during the income year.  

The following examples in the Explanatory Memorandum to the amending bill shows how this will work:

Example where the individual’s credit is less than the company debt

Computer Co has an unpaid PAYG withholding liability for the 2014-15 income year totalling $100,000. Diego was a director of Computer Co throughout that income year and received director’s fees for the income year. He is entitled to a credit of $25,000 for amounts withheld from his director’s fees.

Assume Diego is not liable to a director penalty. Diego must pay $25,000 PAYG withholding non-compliance tax as the total of amounts withheld from payments to Diego is less than the value of the company’s unpaid PAYG withholding liability.

Example where the individual’s credit is greater than the company debt

Maverick Co failed to pay to the Commissioner $4,000 of amounts withheld from withholding payments made during the 2013-14 income year.

Ciara is a director of Maverick Co and is entitled to a credit of $30,000 for amounts withheld by Maverick Co from her director’s fees.

Assume Ciara is not liable to a director penalty. Ciara is liable to pay $4,000 PAYG withholding non-compliance tax as the company’s PAYG withholding liability is less than the total amounts withheld from payments to Ciara.

What to do?

Whilst a director can defend a claim by the ATO for the recovery of a director penalty, those defences are limited. Generally, a director would need to demonstrate that he or she had an illness that prevented them from participating in the management of the business or that they had taken all reasonable steps to ensure compliance.

These new provisions mean that directors should review the company’s systems for remitting PAYG amounts and paying superannuation contributions and ensure that these systems are adequate. Additionally, individuals considering accepting directorships should conduct appropriate due diligence on these systems before acceptance.