Proposed legislation increases directors' personal liabilities for corporate non-compliance with PAYG withholding and superannuation regimes and gives the ATO more enforcement powers, including imposing liability on associates of directors.
New tax legislation introduced into Parliament by the Federal Government on 13 October 2011 is intended to deter fraudulent phoenix company activity and to strengthen protections of superannuation entitlements of employees.
The proposed changes will however affect all directors and inadvertent administrative errors could result in immediate recovery proceedings being commenced by the ATO.
Under current law, a director of a company is liable to penalties where the company withholds tax amounts from payments to employees and other entities but fails to remit those withheld amounts to the ATO.
The ATO can recover the penalty, equal to the amount withheld but not remitted, from the director personally unless, within 21 days of the ATO giving the director a "director's penalty notice" (DPN):
- the company complies with its PAYG obligations by remitting the withheld amounts;
- an administrator is appointed to the company; or
- the company begins to be wound up.
The penalties apply to people who were directors at the time of the non-compliance and also to new directors who do not compel the company to take one of the above actions within 14 days of becoming a director.
Defences are available to directors who, for good reason, did not take part in the management of the company at the relevant time or who took all reasonable steps to ensure the directors complied with the relevant obligations (or no such steps were available).
The Tax Laws Amendment (2011 Measures No. 8) Bill 2011 proposes to:
- "automate" the penalty liability by permitting the ATO to immediately pursue recovery, without issuing a DPN or providing any other notice, where a company fails to comply with its PAYG reporting obligations and its PAYG or superannuation guarantee charge liability is unpaid for more than three months after the due date;
- effectively deny some directors (and their associates) PAYG withholding credits on their own income tax liabilities where the company fails to remit withheld amounts; and
- make directors personally liable for their company's failure to pay employees' superannuation by the inclusion of unpaid superannuation guarantee charge amounts in the DPN regime in addition to PAYG withholding amounts.
What will the changes mean?
In practice, the proposed amendments will allow the ATO to commence immediate recovery proceedings (for either a reported or estimated amount of PAYG or superannuation) which could include third party garnishee orders, commencing debt recovery proceedings or commencement of bankruptcy proceedings.
The amendments also mean that family members and other associates of company directors can also be personally exposed to liability for the company's non-compliance with its PAYG and superannuation obligations. This is achieved by imposing a new "PAYG withholding non-compliance tax" equal to the amount of any PAYG credits to which the family member is entitled in respect of payments received from the company (for instance, on salary and wages).
The ATO must notify the family member before commencing any recovery and may not impose the tax where the directors themselves are liable under the directors' penalty provisions. The tax can be applied not only where the family member knew (or could reasonably be expected to have known) of the non-compliance but also where the family member was treated more favourably than other employees of the company (regardless of personal knowledge).
Once enacted, the new measures will apply to PAYG withholding obligations that are already outstanding, which means there is some level of retrospectivity about the amendments. In respect of superannuation obligations, the measures will only apply from the day of the Royal Assent to the legislation.
The measures do not require companies, directors or associates to have engaged in fraud or dishonesty. Inadvertent errors or mischaracterisation of payments can also lead to the imposition of penalties or PAYG withholding non-compliance tax. For instance, directors and associates can be exposed where the company mischaracterises an employee as an independent contractor and so fails to pay superannuation contributions for that employee.
- Companies should review their PAYG and superannuation compliance procedures to ensure there are no gaps and other risks are identified, including in the characterisation of employees and contractors.
- People intending to become directors should ensure, as part of any due diligence, that they consider the company's PAYG and superannuation compliance procedures;
- Companies, directors and associates should seek advice where gaps in procedures or other risks are identified, or to assist in identifying risks.