Company Directors: Are you personally liable for your company’s unpaid tax and super?
You are a director of a company. One day, a letter arrives from the Australian Taxation Office advising you that you are personally liable for the unpaid tax and superannuation of the company.
Is this a realistic scenario?
The answer is yes, this scenario can happen under Australia’s director penalty regime.
The regime has been part of our tax law for a long time now, and means that directors of companies can, in some circumstances, become personally liable for the tax debts of the company.
Changes to the director penalty regime were introduced earlier this year, with the aim of deterring company directors from engaging in fraudulent phoenix activity, and better protecting employees’ superannuation entitlements.
There are three key changes that company directors need to know:
- Under Australian law, employers must pay employees a minimum of 9% of their wages as superannuation support in each financial year.
If they don’t pay this, the outstanding amount is referred to as a ‘superannuation guarantee shortfall’, and the employer is also charged a ‘superannuation guarantee charge’.
Unpaid superannuation guarantee charges are now covered by the director penalty regime, meaning that directors are now personally liable for a penalty (equal to the charge) if the company has not lodged its superannuation guarantee statement and paid the corresponding guarantee charge by the due date.
- If a company’s tax or superannuation liability remains unpaid and unreported three months after the due date, a director of the company can’t escape liability by placing the company into administration or beginning to wind it up, which was the case previously.
- Under the old rules, directors received a PAYG withholding credit for PAYG withholding tax withheld from wages or directors’ fees paid to directors. The credit was still available even where the PAYG withholding was never passed on to the ATO.
The new rules cancel that credit and make the director liable for PAYG withholding non-compliance tax.
Tips for company directors
These recent changes mean that directors now have even more at stake in making sure the company meets its legal obligations.
If you’re thinking about becoming a director of a company, make sure you consider the company’s PAYG and superannuation guarantee obligations first.
If the company still hasn’t met its obligations once you’ve been there for 30 days, you’ll also become personally liable for a penalty.
It would also be wise for companies to review their PAYG and superannuation compliance procedures to identify any risk areas, such as employees who have been incorrectly classified as contractors, or superannuation on overtime that has been incorrectly calculated (in some cases, overtime should actually be classified as ‘ordinary time earnings’).
Taking a proactive approach to understanding the reality of your company’s current state in these areas is critical to manage your risk as a Director.
Justin Byrne is a guest blogger and Special Counsel at HopgoodGanim where he provides practical and commercial tax solutions for a range of clients.The contents of this post are not intended to be a complete statement of the law on any subject and should not be used as a substitute for legal advice in specific fact situations. HopgoodGanim cannot accept any liability or responsibility for loss occurring as a result of anyone acting or refraining from acting in reliance on any material contained here. The views expressed are the author’s alone and do not represent the views of HopgoodGanim as a whole.