On 5 July 2011, the Federal Government released an exposure draft of the proposed amendments to the Tax Laws Amendment (2011 Measures No. 7) Bill 2011 (Bill) which will make company directors personally liable for unpaid Superannuation Guarantee Charge (SGC) contributions. These changes are effectively an extension of the “director penalty” provisions making directors personally liable for unremitted Pay As You Go (PAYG) withholding tax.
Given the recent decision of the High Court in Roy Morgan Research Pty Ltd v Commissioner of Taxation  HCA 35, affirming the validity and enforceability of the Superannuation Guarantee (Administration) Act 1993 (Cth), the Federal Government is now free to pursue the proposed amendments contained in the Bill with little risk of legal challenge.
Under the proposed new laws, the SGC and PAYG withholding tax liability of a company will:
- follow the directors of the company even after they resign or put the company into liquidation, and preclude the establishment of another entity by the same directors if the directors cannot personally discharge the debt; and
- attach to any new directors who become a director within 14 days of the SGC or PAYG withholding tax debt falling due.
The proposed changes also include additional recovery powers for the Australian Taxation Office (ATO), including:
- the ability to commence actions against directors (or former directors) without notice to the company or the directors after a three month period where SGC contributions have not been made or PAYG withholding tax has not been remitted;
- the power to commence winding up companies that fail to pay SGC or PAYG withholding tax debts, without the need to give notice;
- the discretion to deny PAYG withholding tax credits to directors and their associates personally where they or their company cannot satisfy the SGC and PAYG withholding tax liabilities; and
- the ability to give a notice of estimated liabilities pursuant to which the company or director has 21 days to rectify the notified SGC or PAYG withholding tax liabilities before enforcement action begins.
It is not a defence to a recovery action under the proposed legislation that the company had insufficient funds to meet the debt – the director will be required to satisfy the debt personally.
Although the proposed legislation has not yet been put before Parliament, the Exposure Draft of the legislation indicates that part of the legislation will have retrospective effect in that the ability of the ATO to deny PAYG withholding tax credits to directors and their associates will apply to credits generated from 1 July 2011.
These changes are principally targeted at curbing “phoenix company” activities, where the directors of a company that cannot meet its tax debts place that company into insolvency, and then sets up as a different entity performing the same trading activities free of the tax debt. However, this legislation will also have broader implications, including increasing the likelihood that individual directors (or potentially even former directors) will be personally joined to SGC or PAYG withholding tax debt recovery actions by the ATO, with a corresponding increase in director’s insurance premiums.
Given the recent decision in the Roy Morgan case and the proposed changes to the law, there has never been a better time to review superannuation and taxation arrangements for compliance – in particular, superannuation and taxation arrangements for independent contractors, which are often overlooked in contractor engagement arrangements.
Once the legislation comes into force, individuals proposing to take up new directorships should carry out a proper due diligence of the company’s compliance with its superannuation and taxation obligations to ensure they do not inherit any personal liability.