Recently the Director Penalty regime was significantly extended to include employee superannuation in addition to PAYG withholding.
The Director Penalty regime has been in existence since 1993 to enable the ATO to make directors of companies personally liable for the unpaid Pay As You Go (PAYG) Withholding liabilities of their companies. To make directors personally liable, the Commissioner of Taxation would issue a Director Penalty Notice (DPN) to each director (usually as a last resort after other collection measures had been taken and the liability remained unpaid). The directors would then have 21 days in which to cause the company to pay the liability, appoint a voluntary administrator to the company or place the company into liquidation. Significantly, under the original Director Penalty regime, directors always had the ability to avoid personal liability under the available options.
The Director Penalty regime has now been extended to include the following:
- Directors of companies are now personally liable for their company's unpaid employee superannuation in addition to PAYG Withholding.
- Upon receipt of a DPN for unpaid superannuation or PAYG Withholding, directors cannot avoid personal liability by appointing a voluntary administrator or placing the company in liquidation if the unpaid superannuation or PAYG Withholding was not reported to the ATO within three months of the due date.
- In some instances, directors and their associates (family members) will be liable to a new tax, PAYG Withholding non-compliance tax, where the company has not paid the amounts withheld from their salaries or wages to the ATO.
Following are examples of situations in which directors may be unable to avoid personal liability for unpaid PAYG Withholding and employee superannuation and directors will be liable for PAYG Withholding non-compliance tax:
Unpaid PAYG Withholding
James and Kathy are directors of XYZ Co. In August 2012 $5,000 in PAYG Withholding is deducted from the gross wages paid to employees. The due date for reporting the amount withheld is 21 September 2012. From that day, James and Kathy are technically liable for a director penalty for the $5,000 of unpaid PAYG Withholding. Due to being so busy running their business, they don't get around to lodging the Instalment Activity Statement (IAS) or Business Activity Statement (BAS) for August 2012 until 31 December 2012.
XYZ Co is experiencing cashflow difficulties and so is unable to pay the amount due of $5,000. Soon thereafter, the ATO issues DPN's to James and Kathy for the $5,000 of unpaid PAYG Withholding. As the August 2012 IAS or BAS was lodged more then three months after the due date, James and Kathy cannot avoid personal liability for the $5,000 by appointing an administrator or placing the company in liquidation. The ATO will pursue James and Kathy personally for payment.
To avoid personal liability, James and Kathy needed to have lodged the BAS by 21 December 2012 which is within three months of the due date of 21 September 2012. Had they lodged by 21 December 2012, they would have had the option of appointing an administrator or placing the company in liquidation within 21 days of the ATO issuing the DPN's.
Unpaid Employee Superannuation
David and Bronwyn are directors of ABC Co. For the quarter ended 30 September 2012 an amount of $7,500 in superannuation is payable for employees. The due date for paying this amount to the employees' superannuation funds is 28 October 2012. However due to cashflow issues ABC Co is unable to make the payment by that date. Therefore, XYZ Co must report and pay the amount due, plus interest and penalties, to the ATO as Superannuation Guarantee Charge (SGC) by 28 November 2012. This is carried out by completing an SGC Statement and sending it to the ATO.
From 28 November 2012, David and Bronwyn are liable for a director penalty for the $7,500 of unpaid SGC. Due to being so busy running their business, they don't get around to lodging the SGC Statement for the quarter ended 30 September 2012 until 15 March 2013. ABC Co is still experiencing cashflow difficulties so is unable to pay the amount due of $7,500. Soon thereafter, the ATO issues DPN's to David and Bronwyn for the $7,500 of unpaid SGC. As the SGC Statement was lodged more then three months after the due date, David and Bronwyn cannot avoid personal liability for the $7,500 by appointing an administrator or placing the company in liquidation. The ATO will pursue David and Bronwyn personally for payment.
To avoid personal liability, David and Bronwyn needed to have lodged the SGC Statement by 28 February 2013 which is within three months of the due date of 28 November 2012. Had they lodged by 28 February 2013, they would have had the option of appointing an administrator or placing the company in liquidation within 21 days of the ATO issuing the DPN's.
PAYG Withholding Non-Compliance Tax
Paul is the sole director of KLM Co. During the 2012-2013 financial year KLM Co withheld $10,000 from salaries and wages paid to employees, including $5,000 from the gross salary of $37,000 paid to Paul. KLM Co. reported the $10,000 of PAYG Withholding on its BAS or IAS and these were lodged within three months of each of their due dates. However, due to cashflow issues, KLM Co has been unable to pay the $10,000 to the ATO.
The ATO issues a DPN to Paul for the unpaid PAYG Withholding of $10,000. Within 21 days of the DPN being issued Paul appoints an administrator to the company. As the BAS or IAS were lodged on time, Paul avoids personal liability for the $10,000. However, when Paul prepares his personal income tax return for the 2012-2013 financial year he must declare his gross salary of $37,000 and claim a PAYG Withholding credit of $5,000. However, Paul must pay PAYG withholding non-compliance tax equal to the amount of the $5,000 credit.
Anne is married to Paul and is also an employee of KLM Co in the 2012-2013 financial year. Anne was paid a gross salary of $10,000 and PAYG Withholding of $1,000 was deducted by KLM Co. Even though Anne is not a director, she was constantly kept up to date about the operation of the company by Paul and knew that KLM Co had not paid the $10,000 of PAYG Withholding for the year to the ATO. If the ATO concludes that Anne did not encourage Paul to have KLM Co pay the liability or liquidate the company as the liability arose, Anne will also be liable for PAYG Withholding non-compliance tax. When Anne completes her personal 2012-2013 tax return she must declare gross wages of $10,000 claim the $1,000 of PAYG Withholding deducted from her wages, but pay PAYG withholding non-compliance tax equal to the $1,000 credit.
Critical Steps to Avoid Personal Liability
As a result of the extension of the Director Penalty regime, it is now even more critical than before that directors ensure that PAYG Withholding and Superannuation obligations are met on time. Even if the company is unable to pay these liabilities, directors should ensure that the ATO is notified of the outstanding amounts by lodging BAS, IAS and SGC Statements on time. This leaves the options open to directors to appoint administrators or place their company in liquidation when the ATO issues DPN's. It goes without saying that as the only way to avoid automatic and inescapable personal liabilities is to report all liabilities to the ATO on time, the ATO will become more aggressive in pursuing those liabilities. Directors need to actively manage cashflow to ensure that ATO liabilities can be paid on-time and ATO Payment Arrangements do not default.
Warning for New Directors
New directors of companies should perform a due diligence on the company before they accept the directorship as they can become liable for PAYGW and employee superannuation under the director penalty regime 30 days after their appointment as a director, even where the liabilities arose before they became a director.
For further information on the Director Penalty regime contact Jamie Towers or Nathanael Lee on 3218 3900.
This article was published in the Spring 2012 Horizon. For a pdf version of the newsletter please click here.