New penalty regime significantly increases directors' risks

By Siddharth Soin - Principal

Proposed amendments to the Director Penalty Regime to better protect workers' entitlements, broaden director obligations and help counter phoenix behaviour, make directors personally liable for superannuation contributions for employees. Directors will become personally liable for all PAYG withholding and superannuation contributions that remain unpaid three months after the due date that cannot be paid by the company.

Directors are currently personally liable for any unpaid Pay As You Go (PAYG) withholding from employee wages unless the Directors take action to place the company into administration or liquidation. Under the  proposed amendments this concession is also removed.

What courses of action can Directors take to reduce this personal liability?

Directors’ personal liability for unpaid PAYG withholding and superannuation contributions can be reduced by ensuring that the amounts are paid. This means effective planning, budgeting and cash flow management are all even more critical than ever. You will still have the option of using Tax Office payment arrangements but you will need to be careful of any arrangements that go beyond three months of the due date.

However, should you believe that the amount cannot be paid, to avoid any personal liability for unpaid PAYG withholding and superannuation contributions, a Director would need to place a company into administration or liquidation within three months of the relevant due date.

An extended grace period has been provided to new Directors, such that they will not be liable for company debts that existed at the time they assume their directorship, until 30 days after they became a Director.  This will allow a new Director time to become familiar with the company's accounts.

In addition, Directors will not be personally liable for superannuation contributions that were not paid to a worker, when they “reasonably thought the worker was a contractor and not an employee”.  The effectiveness of this defence is dependent on the position taken that a worker was a contractor being "reasonably arguable" which may prove difficult. 

Finally, directors will not be personally liable for the unpaid PAYG withholding and superannuation contributions where they can establish that they took all reasonable steps to ensure that the company met its obligation to pay the PAYG withholding and superannuation contributions. There is also a limited concession for other good reasons such as illness for not being involved in the management of the company where it was reasonable for that Director not to be involved.

Will the non-lodgement of forms reduce or delay the personal liability?

Not preparing or delaying the lodgement of business activity statements or superannuation guarantee statements will not reduce a Director’s personal liability for unpaid PAYG withholding or superannuation contributions. The due date is set, and the three month period will be calculated with reference to this date.  In addition, the Tax Office will have to power to estimate the unpaid PAYG withholding and superannuation contributions should the relevant form not be lodged.

How will the Tax Office administer the New Penalty Regime?

Over the last few years, the Tax Office has increased its level of communication with companies that have outstanding business activity statements,  GST and PAYG withholding liabilities. None of this will change. However, if an acceptable response to this communication is not received, or if payment arrangements are repeatedly defaulted on, then the Tax Office may issue a Director Penalty notice. Such a notice indicates that the Tax Office may take action against the Director for recovery of unpaid PAYG withholding and superannuation contributions.

Finally, the proposed amendments also give the Tax Office the power to cancel the PAYG withholding tax credits on Directors and their associates wages should the company have unpaid PAYG withholding tax.

With the changes to the Director Penalty Regime expected to be legislated in the coming months, we recommend that you seek expert advice now from the business advisory team at Countplus mbt to ensure that your companies’ PAYG withholding and superannuation contributions can be paid in a timely manner, and minimise your personal  liability.