The 2011 Budget introduced proposed changes to strengthen the operation of penalising directors’ personally for actions in respect of their corporate entities. These changes were intended to protect worker’s entitlements to compulsory superannuation contributions and to address the situation where directors emerge in “phoenix” companies after having previous corporate entities liquidated.
It appears that these changes extend further than originally anticipated and create an increased liability risk personally for all directors.
These changes may expose directors to personal liability where a company has under-reported PAYG or SG withholding amounts due to it adopting a course of engaging a person as a contractor as opposed to being an employee.
Significant Aspects of the Changes
- Directors are now to be personally liable for their company’s unpaid SG amounts (which will be in addition to PAYG withholding amounts);
- The ATO will be allowed to immediately commence recovery action if the company’s liability remains unpaid and unreported 3 months after the due date;
- Should a company’s liability remain unpaid and unreported for more than 3 months, then a director’s personal liability can only be extinguished by payment of the debt or penalty (i.e. placing the company into liquidation will not be sufficient);
- The ATO will have the discretion to prevent directors and their associates from accessing the PAYG withholding credits on their own salaries if the company has an outstanding PAYG liability;
- In addition, a new director can become 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; and
- Directors will be personally liable for their company’s unpaid SG amounts (which will be in addition to PAYG withholding amounts).
Recovery Process for Directors Penalties
Based on these changes it is likely that the ATO would commence recovery and impose penalties on a director where an unpaid liability remains unreported 3 months after the due date.
It would appear that once the 3 months has lapsed the ATO would no longer be required to provide 21 days notice to the director before initiating proceedings and the directors liability can only be extinguished by in fact paying the penalty and therefore extinguishing the underlying liability.
Implications for Directors
Whilst these changes were initially drafted to target “Phoenix” companies it is likely that the provisions will extend further. Directors need to be fully aware of their company’s employee and contractor taxation obligations and the status of any outstanding debts with the ATO. We would recommend that directors review their company’s superannuation obligations in respect of contractors and employees.
Additionally, if you are looking to join a company as a director it would be essential to ascertain the current liability of the company to PAYG and SG liabilities before signing the Consent to act as a director.
For further information about this and other corporate issues, contact Steven Morris via email firstname.lastname@example.org or phone 07 3232 5700.