Changes to the director penalty regime- reporting company liabilities to the ato has never been as important
Changes to the director penalty regime, which took effect on 30 June 2012, have greatly extended the circumstances in which a director will be personally liable for a company’s unpaid tax obligations.
All current and potential directors need to be aware that the risk of personal liability for a company’s unpaid PAYG and superannuation is real.
- The director penalty regime has been extended so that it applies to the superannuation guarantee charge; and
- Directors will no longer be able to absolve their personal liability simply by placing the company into administration or liquidation where PAYG or superannuation is unpaid and unreported 3 months after it was due to be paid.
Under the new and former regimes, a director automatically becomes personally liable for unremitted PAYG (extended under the new regime to unpaid superannuation) at midnight on the day that the company was required to pay those amounts. This is irrespective of whether the ATO has served a director penalty notice (DPN).
However, under the previous director penalty regime, the ATO could not commence recovery proceedings against the director for the company’s unremitted PAYG liabilities until it had served a DPN on the director, and within 21 days the director failed to cause the company to:
- pay the outstanding PAYG set out in the director penalty notice;
- be placed into voluntary administration; or
- be wound-up.
The regime was problematic for the ATO for two principal reasons. Firstly, companies often would not report PAYG obligations, meaning that the ATO would not be aware of the debt. Secondly, directors could use PAYG withholdings as working capital in the hope of trading out of difficulty, and if the ATO served a DPN, then they could absolve their personal liability simply by placing the company into administration or liquidation. In some circumstances, this facilitated ‘phoenix’ activity.
Under the new regime, the ATO will still be prevented from commencing recovery proceedings against the director personally until it has served a DPN.
However, where PAYG and superannuation remain unreported and unpaid 3 months after the due date for payment, then the director cannot absolve their personal liability by placing the company into administration or by placing it in liquidation. Subsequently reporting the debt (i.e., 3 months and 1 day after the debt became payable) will not have any effect.
The only way that the director is now able to avoid personal liability for an unreported debt is by causing the company to pay the debt to the ATO.
Extension to unpaid superannuation.
The new regime also applies to unpaid superannuation payments pursuant to the superannuation guarantee charge, and the Commissioner is able to make an estimate of the unpaid superannuation in this regard.
Importantly, this creates additional exposure for directors where the company has incorrectly classified employees as contractors as the company ordinarily would not have paid or caused for the ‘contractor’ to be paid superannuation.
If an employee has been incorrectly classified as a contractor, then the company would not have lodged a superannuation guarantee statement for the contractor. Because the liability is unreported, the director would not have the option to place the company into administration or liquidation to avoid personal liability for the unpaid superannuation if the ATO was to serve a DPN for that liability.
No personal liability if company reports debt on time.
Despite the changes, where the company has reported the liability within 3 months of it becoming due, then the director will still be able to absolve their personal liability by placing the company into administration or liquidation within 21 days of receiving the DPN.
The new regime does not yet extend to GST.
The changes are extremely relevant to new directors, and reinforce the importance of undertaking thorough due diligence on any company that a person is considering becoming a director of.
If a company has not paid or reported its PAYG and superannuation obligations to the ATO within 3 months after the payments became due, then the new director will become personally liable for those debts 30 days after their appointment.
The new director cannot absolve their personal liability simply by resigning. The new director must cause the company to pay the debt or cause it to be placed in administration or liquidation within 3 months of being appointed.
Key practical actions for directors
- Directors need to ensure that companies they direct report PAYG withholding and superannuation liabilities within 3 months of them becoming due;
- Directors need to ensure that ‘contractors’ are correctly classified and that they are not deemed employees;
- Directors need to ensure that companies have sufficient systems in place to make certain that tax obligations are reported on time and contractors are correctly classified;
- Directors need to ensure that their registered address with ASIC is kept up to date, as DPN’s will be validly served if they are sent to the director’s address set out in the ASIC register;
- Proposed new directors should undertake comprehensive due diligence before accepting an appointment to ensure that the company has at least reported all of its PAYG and superannuation obligations;
- Adequate warranties dealing with tax liability reporting need to be incorporated into share acquisition agreements; and
- Potential purchasers of shares who will in turn be appointed as a director of the acquisition target need to undertake comprehensive due diligence before entering the acquisition agreement.
Pointon Partners has extensive experience advising on matters relating to director penalties. Pointon Partners is able to assist you to understand your obligations under the new regime and is able to give practical guidance on business compliance to reduce your risk of personal liability.
If you have any queries on the matters addressed above, please feel free to contact Anthony Pointon of our office on 03 9614 7707.