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Directors personally liable for unpaid superannuation contributions from 1 July 2011

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The 2011 – 2012 Federal Budget announced that from 1 July 2011, company directors will be personally liable for their company’s failure to pay employee superannuation guarantee amounts.

Currently the ATO can issue a Penalty Notice for unpaid PAYG tax. It is a power often exercised by the ATO as part of its role to collect taxes where a corporate employer fails to pay the tax owed. Directors have a positive duty to cause their company to pay tax that is due. A director that receives a Penalty Notice will become personally liable for a penalty equal to the amount of the unpaid tax if, after 21 days, they fail to cause the company to make payment or place the company into administration or liquidation.

Directors are liable for the penalty “at or before the due date for payment”. Therefore directors who resign before the tax is due will still be caught if they were a director at the time that the tax became payable. Similarly, directors that are appointed after the due date also become liable for the penalty 14 days after their appointment.

As a result of the Budget announcement, the same regime will affect directors of companies which fail to pay the superannuation guarantee charge (‘SGC’). This includes:

  • 9% of each employee’s total salary or wages (“shortfall amount”);
  • an administration fee for each individual employee (currently $20 per quarter); and
  • interest on the shortfall amount from the beginning of the quarter in which the contribution was due until the later of either:
    • the lodgment of a superannuation guarantee statement outlining the shortfall amount; or
    • the 28th day of the second month after the end of the relevant quarter.

The government has emphasised that this expansion of the existing director penalty regime is intended to improve tax compliance and counter fraudulent “phoenix” activities.

Contractors

If it is determined by the ATO or a Court that the contractors engaged by a company are, for legal purposes, employees, this amendment could render directors liable for their companies failing to pay the SGC in respect of contractors. In these circumstances, directors will not be able to avoid liability if a Penalty Notice is issued notwithstanding:

  • he or she held a genuine belief that the workers engaged were contractors;
  • the workers themselves held the initial belief that they were contractors; or
  • the workers were compensated with a higher fee in lieu of receiving superannuation contributions.

Whether a person is a contractor or employee is a question of law, which can only be determined by considering the totality of the relationship between the parties.

We recommend that all current independent contracting arrangements should be reviewed to determine whether any changes need to be made before 1 July 2011. MST has extensive experience in assisting its clients to comply with the most current employment laws, including advising on independent contracting arrangements. Please contact one of our Workplace Relations lawyers for further information in this area.

Defences

Defences exist if a director can prove that he or she could not take part in the management of the company; or he or she took all reasonable steps to have the company fulfil its obligations.

The team in our Dispute Resolution & Litigation group have acted for and advised Directors who receive Penalty Notices under the existing regime. We can also provide comprehensive and tailored litigation and insolvency advice to Directors of companies in all facets of their operations. We invite any reader who receives a Director Penalty Notice – or who wants to discuss issues particular to their company – to contact us.

Authors: Kaye Griffiths and Chao Ni

Send an email to Kaye or Chao