The Government has released draft legislation which proposes changes to the company director penalty regime in the tax law. The main aspects of the proposed amendments involve:
- Extending the director penalty regime to make directors personally liable for their company’s unpaid superannuation guarantee amounts, ie. the compulsory 9%.
- Ensuring that directors cannot discharge their director penalties by placing their company into administration or liquidation when unpaid Pay-As-You-Go (PAYG) withholding or superannuation guarantee remains unpaid three months after its due date.
- In some instances, making directors and their associates liable to PAYG withholding non-compliance tax (effectively reducing credit entitlements) where the company has failed to pay amounts withheld to the Tax Commissioner.
The Government intends to introduce the amendments in its winter 2012 sittings of Parliament, which commence on Budget day, May 8, 2012.
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Company directors now have to face complying with an ever increasing myriad of laws, and not just tax laws. These proposed latest changes add to the complexity of the environment surrounding company directors and any SME owners who are directors of a company should be careful to familiarise themselves with what these new laws mean.
Broadly, the amendments are proposed to commence on the day on which the amending bills receive Royal Assent. However, there are extensive transitional provisions. Among other things, the amendments for reduction of credits to directors and associates apply to amounts withheld during the 2011-12 income year and later income years, if the company withholding the amounts is required to pay them to the Commissioner on or after the day after the amendments become law.
Mistakes about super liability
The draft legislation includes a new defence for directors liable to penalties for superannuation debts where, broadly, they reasonably thought the worker was a contractor and not an employee.
The draft legislation proposes amendments so that a director would not be liable to a director penalty relating to a superannuation guarantee charge, if the director can establish that the penalty resulted from the company treating the compulsory superannuation laws in the Superannuation Guarantee (Administration) Act 1992 as applying to a matter in a particular way that was “reasonably arguable”, and if the company took “reasonable care” in connection with applying that law.
Director penalty notices
The Government noted stakeholder concern that the Commissioner of Taxation should be required to issue a director penalty notice in all cases. The Government said in all cases, the Commissioner would have to issue a director penalty notice and wait 21 days before commencing recovery action, rather than being able to commence proceedings without issuing a notice.
However, the Government proposes to amend the law so that where three months has lapsed after the due date, the director penalty is not remitted by placing the company into administration or beginning to wind it up. Proposed new provisions would provide that new directors will not be subject to the restricted remission options until three months after they became a director, regardless of how long the company has been liable for the debt.
The changes also provide that the Commissioner may give a copy of a director penalty notice to a director at the address of the director’s registered tax agent, if that tax agent’s address is the director’s address for service for the purpose of any taxation law.
The draft legislation includes amendments to ensure that new directors have time to familiarise themselves with corporate accounts before being held personally liable for corporate debts.
Under the proposed changes, new directors will not be liable to a director penalty for company debts that existed at the time they assumed directorship until 30 days (up from the current 14 days) after they became a director.
Similar changes are also proposed in relation to new directors concerning the imposition of the proposed PAYG withholding non-compliance tax. That is, liability to pay the tax will arise for individuals that became a director after the payment of withheld amounts to the Commissioner was due (and not paid) and 30 days after they started as a director, they are still a director and the overdue withholding is still unpaid. The proposed PAYG withholding non-compliance tax may also apply to an individual who was an associate of the new director throughout the 30 day period.
These proposed new laws will put extra pressure on directors in an already complex environment. Any SMEs who think they may be affected should seek professional advice.
Terry Hayes is the Editor-in-Chief of tax news reporting at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.
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