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Director Penalties – The new Regime Posted on October 9, 2018
The three main features to the new law are as follows:
1. Director penalties now extend to a company’s unpaid employee superannuation contributions.
2. Directors of companies which fail to pay PAYG (Withholding) and/ or employee superannuation contributions and fail to report these liabilities to the ATO within 3 months of the due date will be liable to the director penalties which cannot be extinguished by the appointment of a voluntary administrator or liquidator to the company.
3. Where a company has failed to remit PAYG, the directors (and certain associates) will be liable to PAYG non-compliance tax – effectively reducing their entitlement to PAYG credits.
What is the amount of the personal liability?
For superannuation contributions, the director penalty is equal to the amount of a company’s superannuation guarantee charge (SGC). The SGC is made up of three components – the unpaid contributions (superannuation guarantee shortfall) plus a normal interest component and an administration component. The amount of the personal liability will therefore exceed the quantum of unpaid employee contributions.
For PAYG (Withheld) liabilities, the director penalty is the amount of the withheld and unremitted amounts.
Any PAYG (Withholding) non-compliance tax which is payable is the lesser of:
– the total amounts withheld from payments to the director/ associate in the relevant income year
– the company’s outstanding PAYG (Withholding) liability for the relevant income year.
When does the personal liability arise?
For each of the underlying obligations, personal liability will arise on the ‘due date’. But the due date will differ, depending on the nature of the obligation and the size of the entity.
For SGC, the ‘due date’ is the date for lodgement of a superannuation guarantee statement. In the normal course this date is one month after the quarterly payment due dates for remission of superannuation guarantee amounts to the employees’ funds. For example, for the quarter ended 30 June in any year, employee superannuation payments are to be made by 28 July. If the payments are not made, the employer must lodge a superannuation guarantee statement by 28 August. On 28 August, the director becomes personally liable for SGC in relation to the June quarter.
The good news is that personal liability for SGC only attaches to unpaid SGC in relation to the June 2012 quarter and later.
For PAYG (Withholding), the due date will depend on whether the employer is a large, medium or small withholder. Most SMEs will be medium withholders who lodge Activity Statements monthly. For these employers, the due date for payment of PAYG (Withholding) is 21st day of the following month – ie., for amounts withheld in the month of June, the due date for payment is 21 July. On 21 July, the director penalty applies if the PAYG (Withholding) is not forwarded to ATO. In other words, in this example, the director becomes personally liable for unremitted PAYG (Withholding) for June, on 21 July.
The bad news is that the new legislation contains an element of retrospectivity in relation to outstanding PAYG (Withholding). The amendments to the legislation apply to director penalties in existence at 29 June 2012 which were unreported for more than 3 months. Any such director penalties are subject to the ‘new’ rules.
In relation to the new PAYG (Withholding) non-compliance tax, it is payable on the same date as the individual’s income tax for the financial year is payable.
How does the Tax Office recover the Director Penalty or tax?
In order to recover a director penalty, the ATO must issue a director penalty notice (“DPN”), and wait 21 days after issue to commence recovery proceedings. If prior to, or within the 21 day period after receiving the DPN, one of the following happens:
– the company complies with its obligation
– an administrator is appointed to the company; or
– the company begins to be wound up, the director penalty is remitted – ie., the director is not personally liable.
However, the big change from 29 June is that, if the underlying liability (SGC or PAYG (Withholding)) remains unpaid and unreported for 3 months after the due date, the director penalty will not be remitted by the appointment of an administrator or liquidator.
Using our previous example for the June quarter, if the superannuation guarantee statement is not lodged by 28 November and the SGC has not been paid, the director cannot escape personal liability by the appointment of an administrator or liquidator.
Similarly, in our previous example in relation to unpaid PAYG (Withholding), if the Activity Statement is not lodged by 21 October, the only way the director can escape personal liability, once served with a DPN, is ensuring that the outstanding PAYG (Withholding) is paid within 21 days of being given the DPN.
Of course, in relation to director penalties outstanding at 29 June 2012, where 3 months had elapsed since the PAYG(W) due date, and no Activity Statement was lodged, the new director penalty regime will have immediate effect and personal liability can only be extinguished by payment of the underlying obligation.
In relation to the new PAYG (Withholding) non-compliance tax, it cannot be recovered unless the ATO issues a notice on the individual director (or associate). The ATO can only issue such a notice after determining that it is ‘fair and reasonable’ for the individual to pay the tax. Note that the ATO cannot issue such a notice where the director has a director penalty liability due to the company’s failure to pay PAYG (Withholding) for the relevant income year.
Notices issued for the purpose of enabling recovery of PAYG (Withholding) non-compliance tax can be issued no later than two years after issue of the notice of assessment for the individual’s income tax for that income year. The new provisions apply to amounts withheld during the 2011-12 income years or later.
This insight is just a brief overview of the new director penalty regime. Details which have been considered include applications and defence provision which may be relevant to specific circumstances.
These matters should be raised with professional advisers. If you wish to discuss further, please click here to contact us with any queries you may have.