Be aware of changes to the Director penalty regime - directors may be personally liable
Royal Assent was given to the “Tax Laws Amendment (2012 Measures No. 2) Act 2012” on 29 June 2012.
The changes have been introduced by government in an attempt to “strengthen directors’ obligations to cause their company to comply with its existing Pay As You Go (‘PAYG’) withholding and superannuation guarantee requirements” and “reduce the scope for companies to engage in fraudulent phoenix activity or escape liabilities and payments of employee entitlements”.
Under the new legislation, a director can become personally liable for PAYG and Superannuation Guarantee Charge (‘SGC’) that remains unpaid and unreported after three months from the due date.
Previously, where a company had an outstanding PAYG debt, the Commissioner of Taxation (the ‘Commissioner’) could issue a Director Penalty Notice to the director which provided them with 21 days in which to either:
- Remit the amount to the Commissioner;
- Place the company into Voluntary Administration (‘VA’); or
- Place the company into Liquidation.
Upon expiration of the notice period, if no action had been taken, the director becomes personally liable for the company’s PAYG debt detailed in the Director Penalty Notice and the Commissioner could commence recovery proceedings.
The changes now mean that if three months has elapsed from the due date for the PAYG and/or SGC liability the director can no longer avoid personal liability by placing the company into Voluntary Administration or liquidation. The only alternative they have is to remit the amount to the Commissioner.
Although the director cannot escape the personal liability, the Commissioner is still required to issue the Director Penalty Notice and must wait until the expiry of the 21 day notice period before commencing recovery proceedings.
It should be noted that if a company had debt outstanding as at 29 June 2012 that had not been reported to the Commissioner within three months of the due date, then the director will not be able to avail him or herself of the personal liability by placing the company into Voluntary Administration or liquidation.
Alternatively, if the company had a debt outstanding as at 29 June 2012 and it is not yet three months past the due date, they can report it to the Commissioner, and although they will have a potential penalty exposure, they will still be able to take action to place the company into VA or liquidation and extinguish the potential personal liability.
The legislation has also introduced the “PAYG withholding non-compliance tax”. This tax (or penalty) will be levied upon directors and their associates (in certain circumstances) where the company withheld PAYG and has failed to remit the PAYG amount to the Commissioner. The effect will be to reduce the tax credit in the director’s or their associate’s personal income tax returns. This could result in significant personal tax liabilities for directors and their associates where the company failed to remit. An associate is defined in the Income Tax Assessment Act 1936, which includes relatives of the director.
If a company is experiencing financial difficulties and is unable to pay its PAYG, GST, superannuation, and/or trade creditors, the directors have an obligation to seek professional advice and take action to avoid the company continuing to trade. Failure to do so, will now, as a result of this legislation, have a significant financial impact on directors and may lead to an increase in personal insolvency appointments.