The 2011/12 Federal Budget has announced a proposed extension to the director penalty notice regime for a company's failure to pay employee superannuation.

What is proposed by the Government?

There are three key measures:

  • The Government intends that the director penalty regime will be extended to superannuation guarantee amounts, making directors personally liable for their company's failure to pay employee superannuation.  
  • The Australian Taxation Office (ATO) will be given the power to commence recovery against directors under the director penalty regime, without providing a 21 day grace period, for certain unpaid company liabilities that remain unreported after three months of becoming due.  
  • Further, in certain circumstances directors and associates of directors will be prevented from obtaining credits for withheld amounts in their individual tax returns where the company has failed to pay withheld amounts to the ATO.  

When will the rules apply from?

With effect from 1 July 2011.

Understanding the scope of the new rules

The new rules are announced in the context of “phoenix activity”.  

The announcement indicates that the intent is to “strengthen the tax law to counter fraudulent phoenix activity, which involves a company intentionally accumulating debts to improve cash flow or wealth and then liquidating to avoid paying the debt. The business is then continued as another corporate entity, controlled by the same person or group and free of their previous debts and liabilities.”  

However, will the new rules apply to non-phoenix activity? It is arguable that this is unclear from the Budget material. We will wait and see.

Importantly, the reach of the director penalty notice regime looks to be extended, at least for superannuation guarantee amounts, to associates of directors. While the announcement does not indicate personal liability for associates of a director, it seems that amounts held as credits with the ATO may be at risk of offset or forfeiture where the company has failed to pay withheld amounts to the ATO.

What to do now

The risk for liabilities is evident by recent cases on whether contractor arrangements may give rise to a superannuation guarantee charge, such as Brilliant v Commissioner of Taxation [2010] AATA 267, Re Associated Translators & Linguists Pty Limited and FCT [2010] AATA 260 and Roy Morgan Research Pty Ltd v Federal Commissioner of Taxation [2010] FCAFC 52.

In the interim before any consultation or draft legislation is released, reviewing superannuation guarantee charge risks is required, particularly if from 1 July 2011 directors may become personally exposed, and their associates may be prevented from obtaining their credits otherwise owed by the ATO.