Proposed tax law changes will increase the personal liability of directors for withholding Pay-As-You-Go (PAYG) and Superannuation Guarantee (SG) amounts from wages. This is more likely to be a concern for directors of small companies.
Worker Entitlements - Directors to face increased personal liability risk
Proposed tax law changes will increase the personal liability of directors for withholding Pay-As-You-Go (PAYG) and Superannuation Guarantee (SG) amounts from wages. This is more likely to be a concern for directors of small companies.
Pursuant to changes foreshadowed in the May 2011 Federal Budget, on 5 July 2011, exposure draft legislation was issued for public consultation. The legislation was introduced to Parliament in late September 2011. The proposed legislation sets out to increase protection of workers' entitlements to superannuation, strengthen directors’ obligations and enhance deterrence of fraudulent ‘phoenix’ activity by companies seeking to avoid paying worker entitlements.
The key proposed changes:
- Directors will be personally liable for their company’s unpaid SG amounts as well as unpaid PAYG amounts. Currently, directors are personally liable for the unpaid PAYG amounts.
- Once a company’s unreported debt is three months old, the Commissioner of Taxation can immediately commence proceedings to recover the debt and penalty. A director’s personal liability will then only be extinguished upon payment of the debt or penalty. Under current law, the process is longer as the Commissioner must initially issue a director penalty notice and can commence recovery proceedings only 21 days after the issue of that notice. Additionally, directors currently have various options to extinguish personal liability, such as paying the debt, appointing an administrator or winding up the company.
- The Commissioner will have the discretion to reduce a director’s entitlement and director’s associate’s entitlement to PAYG withholding credits relating to withholding payments made from the company and in doing so increase the director’s or director’s associate’s own tax liability.
Under the changes, a new director becomes personally liable for the company’s outstanding PAYG and SG liabilities after 14 days from the time they commence as a director of the company. A director may successfully establish a defence if a director can prove that they were not involved in the management of the company due to illness or extended leave or that they took all reasonable steps to ensure that the directors complied with their obligations (for example, placing the company into liquidation). Importantly, insufficient funds in the company to pay the withholding amounts, will not constitute a defence.
Assistant Treasurer Bill Shorten estimated in October that between 7,500 and 9,000 could be liable based on an estimate that there were 6,000 phoenix companies in Australia1.
Implications for directors
The proposed laws reaffirm the importance of directors being aware of their company’s employee and contractor tax obligations.
Whilst, the central aim of the changes is to protect employee SG entitlements and to deter ‘phoenix’ activity to avoid paying employee entitlements, these changes will also render directors more easily exposed to personal liability where the company has failed to correctly distinguish between employees and independent contractors and as a consequence, incorrectly misreported and assessed PAYG and SG entitlements.
Accordingly directors should ensure that appropriate processes are in place to enable correct classification of workers and correct withholding for the payment of PAYG and SG entitlements.
It is anticipated that it will become law before the commencement of 2012.
1. "Age" 1 November 2011
This update was produced by Herbert Geer. It is intended to provide general information in summary form on legal issues. The contents do not constitute legal advice and should not be relied upon as such.
