Changes to Directors' Penalty Notices Regime - now includes Superannuation Guarantee payments and personal liability for late lodgment
Author: Simon Della Marta, Partner
10 August 2012
The ATO is cracking down on companies that delay filing tax documents in order to delay payment of tax. From 1 July 2012, a director is personally responsible for all company tax that is three months overdue or has not been reported. So if your company fails to lodge its BAS or tax return on time, the directors are automatically liable to pay – even if the company has been placed in administration or has been liquidated. There are additional changes relating to personal liability for payment of superannuation and making family members liable for some company taxes.
The law is effective from 1 July 2012. The effect of the changes is to:
- Extend the director penalty regime so that directors are personally responsible for their company’s unpaid superannuation guarantee amounts.
- Ensure that directors cannot discharge their director penalties by placing their company into administration or liquidation when PAYG withholding or superannuation guarantee remains unpaid and unreported three months after the due date.
- Make directors and their family members (associates) liable to PAYG withholding non-compliance tax in certain circumstances.
Up until 1 July 2012 the Directors Penalty Notice regime effectively placed a personal liability upon directors to pay for unpaid employee withholding tax and PAYG tax payments if within 21 days of service of a Directors Penalty Notice the company did not make suitable arrangements for payment or have the company place into liquidation or Administration.
Since 1 July 2012 the ATO will now still serve a Directors Penalty Notice on the director (or on the director’s registered tax agent) and the penalty (being the personal obligation upon the director) can still be remitted if before the notice is received or within 21 days after receiving the notice:
- the company complies with the obligation; and
- the company is placed into voluntary administration or begins to be wound up.
However, where 3 months has elapsed after the due date and the amount is unpaid and unreported (ie included in the BAS) then the director will still be personally liable even if the company is placed into voluntary administration or begins to be wound up.
In addition to the PAYG withholding and tax liabilities the director can also be liable for the unsatisfied superannuation guarantee payments.
So if the company has not reported the within 3 months of the due date and the amount is outstanding then the only way to avoid personal liability by the director is if the company pays the debt owed. This becomes effective as from 29 June 2012 so if there are any reporting due dates after then (such as Business Activity Statement on 30 June or superannuation guarantee lodgement) directors should ensure those obligations are at least reported. All PAYG withholding liabilities due after 29 June 2012 will be subject to the changes.
The obligations for payment of withholding tax instalments for employees (called PAYG withholding liability) is treated differently. The regime provides a strong incentive for company directors to ensure the PAYG withholding liability is paid as in certain circumstances the directors and sometimes Associates of directors can become personally liable. An Associate is very broadly in that ‘associates of a natural person’ includes ‘relatives, partners, a spouse and children of the natural person’.
Before the regime if a director or their associate were paid wages and the company was to have paid the PAYG withholding and the company did not pay the director of associate received the benefit of the tax being treated as paid. Now where the company has not paid the PAYG Withholding the director will be personally liable to pay it as PAYG withholding non-compliance tax. This tax is not recoverable unless the ATO issues a notice to the individual director or associate and the notice is only to be issued if it is fair and reasonable for the individually to pay the tax.
A company director can be liable to pay the tax where the company of which they are a director has withheld more amounts from PAYG withholding payments than it has paid to the ATO for the director’s income year. This includes where the company has paid some, but not all, of the amounts withheld to the ATO.
There are some defences.
For an associate to be liable to pay the tax the Commissioner must also be satisfied that due to the associate’s relationship with the director or their relationship with the company, that the associate knew, or could reasonably be expected to have known, that the company had failed to pay amounts withheld to the ATO.
In addition, the Commissioner must also be satisfied that the associate:
- did not take reasonable steps to influence the director to cause the company to notify the ATO about the amount withheld;
- did not take reasonable steps to influence the director to cause the company to pay the withheld amounts to the ATO;
- did not take reasonable steps to influence the director to appoint an administrator or have the company wound up; or
- did not report to the ATO or another relevant authority (which might include the Minister, the police, and regulatory bodies including the Australian Securities and Investments Commission (ASIC)) that the company has not paid the amount withheld to the ATO.
In determining what are ‘reasonable steps’ the ATO may have regard to:
- companies’ non-compliance with PAYG withholding and superannuation guarantee obligations;
- the length and timing of the individual’s relationship with the director as an associate;
- the length and timing of the director being a director and taking part in the management of the company; and
- all other relevant circumstances.
These legislative changes were originally promoted as a way of dealing with phoenix operators but the earlier proposed changes were never intended only to apply to phoenix operators.
Interesting is what is not included is personal liability for outstanding GST payments. The current practice of companies using GST collections for working capital may well continue unchecked.
Introduced with the Pay As You Go Withholding Non-compliance Tax Bill 2012 the Tax Laws Amendment (2012 Measures No. 2) Bill 2012 passed both houses of Parliament on 27 June 2012, received assent on 29 June 1012 and are effective law from 1 July 2012 but in some cases has retrospective operation.
Holman Webb can assist you in understanding fully what your obligations are so as to ensure your business is compliant reducing the risk of personal obligation on you as a director and your family members.
Simon Della Marta
T: 02 9390 8310