Directors’ Personal Liability for Unpaid PAYG and Superannuation
The law that imposes personal liability upon company directors for a company’s unpaid PAYG tax was modified and strengthened on 30 June 2012.
Company Directors can become personally liable for an amount equal to their company’s unpaid PAYG Withholding Tax if the Commissioner of Taxation issues a director penalty notice in respect of the unpaid liability. This means that a director’s personal assets can be at risk.
Under the old law, a 21 day period was required to pass before the ATO was permitted to recover the amount the subject of the director penalty notice from the director. However, a director could avoid personal liability for the penalty by placing the company into liquidation or voluntary administration within the 21 day period.
Under the new law, directors can no longer escape personal liability for unpaid PAYG withholding amounts by placing the company into liquidation or voluntary administration. Directors’ personal liability is now automatic, and applies to any PAYG debt that is unreported, unpaid, and over three months old.
The new regime also extends the ambit of director penalty notices and recovery by:
- extending the director penalty notice provisions to unpaid superannuation guarantee amounts;
- enabling the ATO to impose upon directors and their associates (a broadly defined term) for PAYG withholding non-compliance tax. This will effectively reduce the tax credits to which the director and/or the director’s associates would otherwise be entitled.
There are limited defences available to avoid personal liability under a director penalty notice. For instance, if a director can prove that they were not involved in the management of the company due to illness, they will not be held personally liable. Likewise, if the director took all reasonable steps to ensure that the amounts were paid.
Although the amended legislation was primarily introduced to counter the operation of so called “phoenix” companies (whereby a company carrying PAYG debt is simply wound up only to be replaced by a new company that continues the former company’s business), it encompasses all companies and makes no distinction between those that are phoenix companies and those companies that through administrative oversight or error inadvertently fail to comply with their PAYG and Superannuation Guarantee obligations.
Directors must be vigilant to ensure that their companies comply with their PAYG and superannuation guarantee obligations to avoid becoming personally liable for these payments as soon as the relevant debt is older than three months and is unpaid and unreported.