Directors are now personally liable for unpaid superannuation guarantee charge (SGC) payments to staff. While initially designed to prevent phoenix company activity, the new laws that applied from 1 July 2012, extend well beyond phoenix company activity (whereby the assets of a struggling company are transferred to a new business, leaving behind debts, tax bills and unpaid employee entitlements).
The new law extends the director penalty and estimates regime beyond PAYG withholding to the super guarantee charge. That means that if a company fails to remit SG to the employee’s funds on time, the Directors can be personally liable for the payment.
A director penalty is triggered when a company’s liability for PAYG withholding or Superannuation Guarantee remains unpaid and unreported 3 months after the due date. The Tax Commissioner will then issue a Director penalty notice to either the Director or their tax agent. The director penalty applies even if the company is placed into administration.
In particular, directors should be aware that they can no longer avoid personal liability under the Director Penalty Regime (DPR) by placing their company into administration or liquidation, even if prior to a Director Penalty Notice (DPN) being issued. As a result of recent changes, the ability of a director to avoid personal liability in this way has been removed in circumstances where the company’s PAYG withholding and/or Super Guarantee charge remains unpaid and unreported 3 months after the relevant due date. The ‘due date’ is the 28th of the month following the end of the relevant quarter.
This area of law is currently on the ATO Hit List. Specifically, the ATO has begun making use of its recently expanded powers under the DPR and are cracking down on the directors of non-complying companies. In fact, over the past few months, the ATO have been sending warning letters to directors of companies with unpaid SGC obligations. If a director receives a ‘warning letter’, they must take immediate action to avoid personal liability under the DPR.
Be careful if you use contractors
If your company uses contractors, ensuring that your contractors meet the definition of an ‘independent contractor’ is more important than ever. Remember that where a contract is principally for labour, that person might be treated as an employee and in those circumstances, superannuation guarantee will be payable regardless of what your agreements call the relationship. The director penalty regime will extend to SGC payments for employees misclassified as contractors. The only out is if it was reasonably arguable that the company took reasonable care in applying the law – however, naivety is not an excuse under the law.
For more details on the ATO approach to the Director Penalty Regime, click this link
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