The Federal Government has recently introduced changes to the tax laws aimed at protecting employee entitlements and deterring phoenix activities of businesses. Phoenix activities occur where businesses intentionally accrue debts in one corporate entity, enter voluntary administration or liquidation to avoid paying those debts and then re-emerge in a clean entity, free of the debts but still controlled by the same owners.
Under the previous law, company directors could be liable to penalties where the company withheld amounts from payments under the PAYG provisions, including salary and wage payments to employees, but failed to remit the amounts to the Australian Taxation Office. The Tax Office could issue a "director's penalty notice" for a penalty equal to the amount withheld but not remitted. However, no action could be taken to recover the penalty for 21 days after the notice was given and a director could extinguish their liability if, before the end of that period, the director caused one of the following to happen:
the company remitting the withheld amount to the Tax Office;
the company entering voluntary administration; or
a liquidator being appointed to the company.
Defences are available to directors who can show that they were not involved in the management of the company at the relevant time due to illness or that they took all reasonable steps to ensure compliance.
These penalty provisions had been introduced to encourage corporate compliance with tax obligations as part of reforms that saw the Tax Officer lose its priority against other creditors in a company's winding-up. Although they are aimed at deterring phoenix activity, liability does not depend on the parties having engaged in such activity.
As part of the 2011-12 Budget, the Government announced changes to expand and strengthen these arrangements. In particular, the Government expressed concern that the existing provisions allowed directors to escape liability by placing the company into administration or liquidation as, where this happens, the amounts were also not likely to be recovered from the company. After exposure drafts and community consultation, the Tax Laws Amendment (2012 Measures No 2) Act 2012 passed into law on 29 June 2012.
The new law makes a number of important changes to the personal liabilities of directors, including:
Making directors personally liable to pay penalties for unpaid Superannuation Guarantee Charge, as well as PAYG amounts withheld but not remitted.
Companies which engage substantial numbers of contractors who may be considered employees at common law face a particular risk here. If contractors are subsequently determined to be employees and no superannuation contributions were made for those individuals, directors could become personally liable retrospectively for this failure.
To avoid this, the new law provides a defence if the company treated the SGC law as applying to it in a way that was reasonably arguable and taken reasonable care in applying the SGC law, which should include a determination of individuals are contractors or employees.
No option to place the company into voluntary administration or liquidation
The amendments remove the option of placing the company into voluntary administration or liquidation where three months have elapsed from the time the unpaid SGC should have been paid, or the withheld PAYG amounts remitted to the Tax Office.
This means that directors will remain personally liable for PAYG and SGC debts after the three month period unless the company itself is able to pay or a defence is otherwise available.
Additional tax liabilities for directors and their associates for PAYG non-compliance
If a director is not liable to a director's penalty for PAYG amounts withheld but not remitted but is entitled to PAYG credits against their own tax liability, the director could become liable to pay a new PAYG withholding non-compliance tax. The amount of the tax will be the lesser of the PAYG credits available to the director and the company's PAYG withholding liability for the relevant income year.
The effect of this is that directors will lose the benefit of their own PAYG credits, and therefore pay higher amounts of tax personally. There are defences to payment of the tax available which are similar to those availability to directors penalties.
Significantly, family members or other associates of directors can also become liable to pay the tax, even though they are not themselves directors. This can only arise in certain circumstances, including where the director is not liable to a director's penalty and:
the associate knew or ought reasonably to have known that the company failed to remit withheld amounts and the failed to take reasonable steps to ensure that the amounts were remitted, that the Tax Office was notified or that the company was placed in administration or liquidation; or
the associate was treated "more favourably" than other company employees in relation to PAYG withholding.
The exact scope of these arrangements, and how they will be administered is unclear. However, there is a risk to spouses and other family members of directors of the tax becoming payable even where they were not aware of the relevant circumstances but the Tax Office considers they ought reasonably to have known simply by virtue of being an associate of the director. Further, as the liability only arises if the director does not have a director penalty liability, it is possible that an associate could find themselves liable to PAYG withholding non-compliance tax, even though the relevant director has a defence to the relevant penalty.
The Government had also originally proposed to "automate" the director's penalty provisions. This would have meant that the Commissioner could take action to recover the penalty from a director, even though the director had not been notified of his or her liability. However, the Government has chosen not to proceed with this change at this stage.
Nevertheless, these amendments mean that directors and their associates should review their companies' systems for remitting PAYG amounts and paying superannuation contributions and ensure that these are adequate. Additionally, individuals considering accepting directorships should ensure that they conduct appropriate due diligence on these systems before acceptance.