The Tax Laws Amendment (2012 Measures No. 2) Act 2012 (and related amending legislation) became law on 29 June 2012. These Acts have the effect of dramatically broadening the potential exposure of company directors to personal liability for a company’s tax obligations.
Directors could already prior to this legislation be served with a notice by the ATO making them personally liable for PAYG and other withholding amounts that a company failed to remit. The new legislation, however, expands this regime in several significant ways that we will examine in this article.
Super now included
The regime has been broadened beyond PAYG to also include superannuation guarantee charge payments that a company fails to make. The ability of the ATO to fix directors with liability for the company’s super is quite novel.
Voluntary administration is no protection
In order for the ATO to sue a director and recover a penalty under the director penalty regime, it is necessary (both under the former law and the new law) for the ATO to first serve a penalty notice on the director giving 21 days for the director to cause the company to comply with its obligations.
Under the former law it was also possible for a director to avoid personal liability by causing the company to be placed into voluntary administration or liquidation within that 21 day period. However, under the new law, a director can no longer avoid liability by taking one of these steps if the PAYG withholding is not paid, or the superannuation guarantee is not both reported and paid, 3 months after the due date.
Accordingly, it is now more critical than ever that directors ensure that PAYG and super obligations are kept up to date, as there will be no escape from personal liability once the payment and reporting obligations fall 3 months overdue.
There are other defences to personal liability under the director’s penalty regime, both under the former law and the new law. Briefly, the defences are that a director was either too ill to participate in the management of the company or that the director took all reasonable steps to ensure that the directors complied with their obligations to cause the company to comply with its PAYG and super obligations.
Whilst those defences still exist under the new law, in our experience they are very difficult to prove and directors are almost never successful in relying on them. Accordingly, directors should assume that they will not be able to rely on them and that failure to ensure compliance before the “3 month overdue” date will be fatal to their prospects of avoiding liability to a personal penalty.
Directors to lose personal PAYG credits
One of the problems that the new law has addressed is that directors were formerly able to continue to claim PAYG withholding credits (from amounts withheld from payments to them by the company) in their individual tax returns even when the company had actually failed to remit those withheld amounts to the ATO. In a sensible amendment, the parliament has in this new law closed down this abuse.
The way in which this has been done is to impose a new tax (called a “Pay as you go withholding non-compliance tax”, rather a mouthful) on directors (and in certain cases, on their associates) where they have received amounts from the company from which amounts have been withheld but not remitted to the ATO. The amount of the tax imposed is designed to counterbalance the amount of the “illegitimate” PAYG credits the director is entitled to claim, effectively reducing those credits.
Tony Riordan is our Tax Principal and is available to provide guidance to company directors concerning their potential exposure under this new law and in relation to taxation generally.