Directors penalties, estimates and statutory demands
Indications are that the compliance program for unremitted PAYG withholding and unpaid superannuation contributions by employers will be stepped up in 2013 as the 2012 amendments are ‘bedded down’. As a result of those amendments and internal administration reforms the time taken by the ATO to issue a Directors Penalty Notice (‘DPN’) has been very substantially reduced. Advisers can expect to see a lot more of them in 2013.
Hands up if you haven’t complied
For some time the ATO has used data matching against employee returns claiming PAYG contributions to identify employers who have not remitted contributions. The ATO may have a new source of intelligence to identify corporate non-remitters; the taxpayers themselves.
One of the effects of the 2012 amendments is that a director’s personal liability for unremitted PAYG or for Superannuation Guarantee Charge (SGC) liabilities where superannuation contributions have not been paid on time (‘Director’s Penalty’) is no longer automatically remitted by liquidation or administration of the company. Remission of a Director’s Penalty by such steps now only occurs where the company reported the relevant shortfall to the ATO within 3 months after it should have made the payment. (s.269-30 Schedule 1, Taxation Administration Act 1953 (TAA))
The Director’s Penalty arises automatically when a relevant payment is not made, no DPN needs to be sent in order for the Director’s Penalty to arise. (s.269-20) All existing Director Penalties relating to unreported shortfalls became incapable of remission by liquidation or administration upon the amendments coming into force on 29 June 2012. For those directors, unless the company pays the unreported shortfall, it is too late to avoid personal liability.
Under the current regime there is a strong incentive for directors to cause companies to report shortfalls in PAYG remittance or superannuation payments to the ATO within the 3 month period. The Directors’ Penalty still arises, but it remains capable of remission by administration or liquidation.
Issuing a DPN where such a shortfall has been reported is low hanging fruit for the ATO. We have not yet seen DPNs routinely sent upon shortfalls being reported, but as patterns of non-compliance are established, we can expect to see the ATO serving them more frequently.
Where angels fear to tread
The legislation refers to two periods in relation to new directors. Firstly under s.269-20(3) a new director becomes liable for a penalty relating to prior unpaid PAYG and SGC of the company 30 days after appointment as a director. What is not commonly stated is that such liability will arise even if the new director resigns within that 30 day period. Only if the company, or other directors, pay the liability or the company goes into administration or liquidation will the penalty not arise.
Secondly, under s.269-30(3) a new director will have their Director’s Penalty remitted if the company goes into liquidation or administration within three months after their appointment. Because the penalty is remitted the new director would appear not liable for contribution to paying directors under s.269-45.
So what can a new director do to avoid liability other than causing the company to pay ? There is a defence in s.269-35(2) of taking all reasonable steps to cause the company to comply or be put into administration or liquidation. When determining what are reasonable steps, regard is to be had to when and for how long a person was a director and took part in management and all other relevant circumstances (s.269-35(3)). In the case of a new director would moving a Board resolution for the appointment of an administrator and resigning if such resolution was defeated, be sufficient ? It has been suggested that such a director is a contingent creditor who could apply to the Court for the winding up of the company, and if they failed to do so would not have taken all reasonable steps. It may turn on the interpretation of “those things” in s.269-35(2)(b), does that phrase refer to the directors causing the company to comply or go into administration or liquidation, or the company doing those things ?
In any event new directors MUST do their due diligence regarding unpaid PAYG and Superannuation liabilities prior to accepting appointment. After appointment could well be too late to avoid liability.
They sent it where?
If you are a director of a company, when was the last time you updated your address on ASIC records of the company ? The ATO can give a director a DPN by posting it to that address (s.269-50) or to a director’s registered tax agent. If you have moved house since appointment as a director, the address may be out of date and you may not receive it. A director’s registered tax agent may have no involvement with the affairs of the relevant company. The mere fact that you don’t get the notice, however, will not stop it being ‘given’ at law (s.269-25). Moreover, the time to take any step which might result in remission of a Directors Penalty starts from posting. Time can expire before you become aware of a DPN if your address details are not up to date.
Some estimates are never wrong
The ATO can estimate how much PAYG withholding or superannuation it reasonably believes a company has failed to pay and give notice to the company of such estimate (Subdivision 268B Schedule 1 TAA). When it does so, the estimate becomes payable in its own right as a separate and parallel liability with the actual shortfall (s.268-20). A director becomes liable for a penalty in the amount of the estimate if it is not paid on its due date (s.269-10,15,20).
The estimate is payable, even if the actual shortfall is less, has been paid in full or never existed. The taxpayer gets two opportunities to reduce or revoke the estimate. Within 7 days after the estimate is given, the taxpayer may give a statutory declaration specifying the unpaid amount of the underlying liability. Within 14 days of service of a winding up application or of appearance in a proceeding to recover the estimate the taxpayer may file an affidavit specifying the unpaid amount of the underlying liability. The estimate, and any statutory demand based on it, will then be deemed amended to such specified amount (s.268-40).
In Australia DIS Pty Ltd v Deputy Commissioner of Taxation [2012] VSC 331 a company applied to set aside a statutory demand based on an estimate where the underlying liability arose in relation to a trust. The company said it was not the trustee of the trust at the relevant time and submitted there was a genuine dispute. Both the Associate Judge at first instance and Ferguson J. on appeal dismissed the application on the basis that the estimate was payable regardless of any dispute about the underlying liability. His Honour noted that the company was able to file an affidavit under s.268-40 if the ATO commenced a winding up application on the statutory demand.
SGC Late Payment Offset as an offsetting claim
An example of an offsetting claim that might exist is the late payment offset relating to SGC. Superannuation Guarantee Administration Act 1992, s.49(3A) If a company has paid superannuation payments out of time, it can elect to apply such payments to offset SGC. Superannuation payments are deductible, SGC payments are not. If the company makes an election and pays SGC that has arisen then the resulting credit would seem capable of being an offsetting claim for the purposes of a statutory demand.
Paying twice is worse than paying once
Directors who are personally liable for a Directors Penalty can be tempted to contribute their own funds to a company and have it enter into a payment arrangement with the ATO. This can be a trap should the company eventually fall into liquidation. Under s.588FGA of the Corporations Act the directors are liable to indemnify the ATO for any preference payments recovered by a liquidator relating to payments of PAYG. The directors will then have paid such amounts twice, once to the company so it can pay the ATO and again to the ATO when the liquidator recovers the preference.
That could be avoided by paying the Directors’ Penalty instead of the underlying liability. Although the ATO has power to apportion payments to various liabilities, provided that a payment was clearly being made by a director from their own money and not from the company’s funds, then the risk of a preference in a subsequent liquidation should be able to be avoided.
Before accepting an appointment as a director, or contributing money to a company as a director to pay outstanding PAYG or SGC liabilities, you should seek legal advice.
Please contact Andrew Cox or Anthony Pointon of our office on 03 9614 7707 to obtain advice in those circumstances.
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