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Beware, as a company director you can now be personally liable for unpaid superannuation and PAYG withholding!

Since 1993 the ATO has had the power to make the directors of a company personally liable for unpaid PAYG withholding, under the 'director penalty regime'.  From 1 July 2012 this regime has been extended so that the Commissioner will also be able to make directors personally liable for any unpaid superannuation.

A worrying feature of the new regime is when a PAYG withholding of superannuation liability remains both unreported and outstanding for over 3 months, there is no way for a director to avoid personal liability.  while this still requires the ATO to issue a 'director penalty notice' many directors may not be aware of an unavoidable personal  liability until it's too late.

What do the new rules cover?
  • PAYG withholding
  • Compulsory superannuation contributions

When can a director become personally liable?
  • The ATO may issue a 'director penalty notice' if the company does not pay its PAYG withholding and superannuation debts by the due date.
  • The notice may be issued to all of the directors or only one of the directors for the full amount of the liability.
  • The company directors then have 21 days to respond to the notice.
  • At the end of the 21 days the ATO may commence legal action to recover the debt against the directors personally.
  • The notice may be issued to the director's residential address or that of the tax agent.

As a director, how can you respond to the notice?
Personal liability for a directors penalty notice may be avoided if any one of the following things happen within 21 days of receiving the notice:
  • the company pays its outstanding debt
  • an administrator is appointed to the company
  • the directors commence winding up of the company

This is relatively similar to the old regime but with one new important feature.  If a debt remains unpaid and unreported for more than 3 months after the due date then the directors can only escape personal liability by paying the company's outstanding debt.

For new directors, they will have 30 days to make themselves aware of a company's position in relation to these liabilities.  After the 30 days have lapsed the new directors may receive a directors penalty notice for amounts payable before their appointment.

If the company is placed into administration can directors still be liable?
Where the company has been validly placed into administration, the directors and their associates can still be liable to pay PAYG withholding non-compliance tax.  This effectively stops directors from claiming PAYG withholding on wages paid to themselves in their personal returns.  As you can imagine this will be quite a surprise for someone expecting a refund on lodgement of their personal tax return and getting the opposite result.

This rule can also extend to associates such as wives of directors who work in the business and who are aware of the company's financial position.

What can I do to ensure I's not affected by these rules?
  • Ensure all PAYG withholding and superannuation obligations are lodged and paid on time, or at least no more than 3 months after the due date.
  • Review your employees and contractors to ensure that you are meeting your PAYG withholding and superannuation obligations.
  • Ensure the director's residential address reported with ASIC is correct.
  • Where you have not paid sufficient superannuation by by the end of a quarter the superannuation guarantee charge must be reported in the form of a 'Superannuation guarantee statement' to the ATO, or at least within 3 months of the due date.
  • Ensure that directors personal assets are sufficiently protected or otherwise not held in directors names.
  • New directors should review the company's prior PAYG withholding and superannuation lodgements within 30 days of appointment - after this time a new director will become liable under the new rules.

The next step?
The best defence against these new rules is to ensure that your business is in a strong position to lodge and pay all its obligations on time.  This requires consideration of both the financial, strategic and administration functions of your business.

Prevention is always better than cure.  You may wish to undertake an asset protection review of establish whether your assets are at risk in the event of receiving a director's penalty notice.

For more information on undertaking an asset protection review or to arrange a meeting with one of our business improvement specialities, please contact one of the partners at PRT Chartered Accountants.