The new legislation, which is currently being debated in Parliament, seeks to implement new company ‘director liability arrangements’, which make directors personally liable for certain failures of their business with respect to unpaid PAYG tax and superannuation guarantee amounts.
Who is affected?
Existing directors remain to be liable but interesting newly appointed directors become personally liable after fourteen (14) days from the time they commence as a director of the company, even if the debts were incurred prior to their directorship.
Liability may also extend to associates of directors, including spouses, children, partners and relatives.
The Problem
The main issue that the proposed legislation is trying to address is known as “Phoenix companies”.
A Phoenix company is one which operates for the sole purpose of intentionally accumulating significant amounts of debt and then placing the company into voluntary administration or liquidation in order to avoid repaying the accumulated debt.
Subsequently, a new business emerges as a separate corporate entity, controlled by the same people, but conveniently free of any debts.
The Aim
The main aim of the draft laws is to target and put a stop to fraudulent operations by companies, particularly identifiable Phoenix activity. The way it seeks to achieve this is addressed below.
The nexus between the new laws and the aim
Some of the more notable aspects of the draft legislation include (amongst others):
1. making directors personally liable for their company’s unpaid superannuation guarantee due to employees;
2. making directors personally liable for their company’s unreported and unpaid PAYG tax due to the Australian Taxation Office; and
3. broadening the powers of the Tax Commissioner to handle such matters.
The power of the Tax Commissioner and the extent of a Directors liability
The draft laws enable the Tax Commissioner to impose sanctions directly against directors in relation to outstanding superannuation and PAYG tax.
Superannuation Guarantee
With respect to non-payment of superannuation by the company, the Tax Commissioner will have the power and discretion to:
1. estimate and quantify the amount of unpaid superannuation guarantee without the need to identify the actual employee to whom the unpaid super is payable; and
2. make the director of the company personally liable to pay the outstanding superannuation amounts.
PAYG tax liability
With respect to failure to report and non-payment of PAYG tax by the company, the Tax Commissioner will have the power and discretion to:
1. preclude directors from accessing their own PAYG credits arising from their own individual salaries;
2. recover the amount of unpaid PAYG withholding liability, withheld by the company, directly from a director’s personal salary;
3. recover the amount of unpaid PAYG withholding liability, withheld by the company, directly from a director’s associate; and
4. impose the payment of a new ‘PAYG withholding non compliance tax’ upon the director.
Commencing legal proceedings
The draft laws enable the Tax Commissioner to commence legal proceedings directly against directors:
1. without the need to issue a ‘Director Penalty Notice’ (which ordinarily allows the company twenty-one (21) days notice to rectify the problem); if
2. the company/s fails to pay the superannuation, or report and pay the tax, within three (3) months after the respective liability falls due.
This ensures that companies are not given the opportunity, after receiving the 21 days notice, to simply turn around and wind themselves up in order to release themselves from their obligations to report and pay the outstanding amounts.
Directors defence against liability
Although limited, defences to a director’s personal liability include:
1. proving that the outstanding amounts owing were in fact duly paid and/or reported;
2. proving that the director/s was not directly involved in the management of the company at the time, due to valid reasons such as illness or authorized leave;
3. proving that the director/s exhausted all reasonable steps necessary to ensure that the director/s complied with their obligations (including placing the company into liquidation leading to the failure to report and pay).
It is not a defence for a director to argue that the company had insufficient funds to pay the PAYG tax and superannuation amounts. Nor can a company remove itself from its obligations by simply liquidating itself.
After a company’s liability remains unpaid and unreported for more than 3 months, a director’s personal liability can only be removed by payment of the outstanding amounts. Liquidation cannot absolve a director’s personal liability.
What are the implications of the new laws?
The laws are a positive move insofar as it seeks to put a stop to fraudulent Phoenix operations. However, companies should ensure that their business practices are up-to-date in order to comply with the draft laws (if passed) and ensure that they, and indeed their directors, are not unnecessarily targeted by the tax office with respect to innocent mistakes brought about by a misunderstanding of the principles and/or poor financial planning.
Directors should be well aware of their company’s PAYG tax and superannuation obligations (including employees and contractors alike).
Directors should ensure that workplace systems and checks are updated and practices are put in place to monitor important dates in order to guarantee compliance with the 3 months rule imposed by the new laws.
Companies with significant outstanding PAYG tax liabilities and superannuation guarantee charge amounts should try and settle the outstanding amounts immediately or think about seeking voluntary administration or liquidation prior to the new laws being formally enacted.
Need Help?
We are here to assist your company understand the new laws and ensure that you are well prepared to comply with your obligations which are expected to be in force in the next six (6) months. If you need to discuss your situation, contact us.
