Running a business just got a bit more risky for directors, with the introduction of new laws relating to automatic personal liability for directors for their company’s unpaid superannuation guarantee amounts and unpaid Pay As You Go (PAYG) withholding tax.
On the 29th of June 2012, new legislation was introduced to amend the director penalty regime.
Prior to the new legislation, directors were provided 21 days’ notice before they could be held personally liable for unpaid PAYG amounts. This notice was known as a “director penalty notice”, and effectively gave directors a 3 week window in which they could appoint an administrator or begin the wind up of the company, to extinguish personal liability.
However the new legislation removes this notice period, and therefore removes this previous window to escape personal liability. It also extends the scope of personal liability to include unpaid superannuation guarantee payments. Under the new legislation, directors will now automatically become personally liable for superannuation guarantee liability and PAYG withholdings that are unpaid and unreported 3 months after the due date, and they can no longer avoid this liability by winding up the company.
The new legislation doesn’t stop here. Additionally, it also provides that directors and “associates” of directors (which can even include family members) may be liable to pay a non-compliance tax that would essentially restrict them from obtaining personal tax credits for “withheld amounts” if the company has failed to remit those “withheld amounts” to the ATO.
What this means, in layman terms, is that if you have a relative that is employed by a company that you are a director of, and the company withholds tax each month from their salary, but the company does not pay those withheld amounts to the ATO, then your relative may not be able to claim those amounts in their tax return as tax they have paid. Ie they might effectively have to pay their tax component again, personally!
On the flip side, if you are working for a company where one of the directors is a relative, if that company hits financial problems and stops paying the ATO, you might find that even though they have been withholding tax from your pay each month, you may not receive any tax credit for those amounts that were withheld from your pay.
In summary, here are a few key features of the new law:
- Directors may be personally liable for PAYG and superannuation guarantee charge liabilities that have not been paid by the company.
- Directors won’t be able to discharge a director penalty by winding up the company when PAYG or super payments are unpaid and unreported 3 months after the due date.
- Directors, former directors, and associates (which can include partners, spouses, relatives and even children of the director) may not be able to use PAYG credits in their own tax returns where a company has not paid the ATO.
- A new director has a “no liability” period of 30 days for any existing outstanding debts of their company.
- The Commissioner can serve a director penalty notice on the director personally or at their tax agent’s address (so make sure your tax agent always knows how to find you!).
So what does this mean for you practically as a director?
- Get your house in order, and get all of your lodgements up to date now.
- From now on, make sure you are even more vigilant in ensuring that your company is meeting their due dates for financial reporting and payments.
- Think about and if necessary change the way you conduct business. Stay on top of debt recovery, be strict with credit limits, and obtain personal guarantees from directors of companies that owe you substantial amounts of money. Now that the ATO has made it clear they wont continue to accept being used as an unpaid source of credit, you might find that financially distressed customers take even longer to pay you (and may even be at more risk of being wound up than in the past, if their directors decide to take their own action to avoid personal liability).
- If your company is in financial distress, then the decision to appoint an administrator, or begin a wind up of the company, should be made before the company gets to the point where it is more than 3 months behind in its reporting and payment obligations.
- Do thorough due diligence before you take on a position as a director – make sure you understand the company’s current financial position. Don’t take on a position as director lightly.
And if you are a relative of a director and you know the company has not been paying the ATO, speak up early, and loudly.
There are also a few other changes on the horizon. One bill currently being considered proposes to impose personal liability on directors for the debts of a company that has a similar name to a failed liquidated company. This bill is still being considered, but it is clear that there is a lot of activity in this area at the moment, so its important to keep an eye on all of these developments if you are director, as they may very well impact you directly.
If you would like to access the Explanatory Memorandum to the new laws or if you have any questions at all in relation to your duties as a director, drop me an email me at joan[email protected] or call us on 02 8006 0830.