Updated November 12th 2013

On 29 June 2012 the Federal Government passed legislation to amend the director penalty regime to make company directors personally liable for unpaid employee superannuation contributions. This measure extends the existing personal liability upon directors for Pay As You Go Withholding amounts not paid to the ATO).

The new regime aims to attack ‘phoenix’ activity, whereby companies with unpaid PAYG withholding and superannuation liabilities are wound up and business recommences in a new and very similar entity structure.

The legislation aims to reinforce the importance of paying employee PAYG withholding and superannuation by imposing more onerous personal obligations on directors. This applies to directors of all entities regardless of any intentional engagement in phoenix activity.

In addition, where PAYG withholding is unpaid on behalf of directors and their associates, personal income tax credits for the amounts unpaid will be denied by the ATO upon assessment of their individual income tax returns.

Under the old rules, a director could extinguish personal liability upon receiving the penalty notice by taking the following action within 21 days:

  • Appointment of an administrator to the company
  • Winding up the company
  • Payment of the debt

Under the new rules, appointment of a voluntary administrator or liquidator will not discharge the personal liability if debts remain unpaid and unreported for 3 months.

Non reporting of superannuation liability

The superannuation guarantee liability is regarded as payable even if it is not reported or assessed. The ATO now has powers to estimate assessments of unpaid superannuation, similar to the existing powers to estimate unpaid PAYG.

Notices to Tax Agent

The ATO can now issue Director Penalty Notices to the director’s registered tax agent rather than the director’s home address.

New directors

Individuals considering appointment as a director should review the financial statements for unpaid superannuation and PAYG liabilities before accepting the role. New directors will only have 30 days from their appointment before they become liable for any outstanding obligations under the new rules. The ‘old rules’ apply from day one of appointment.

Defences limited

Certain defences are available for directors where a notice is received, such as illness and taking “reasonable steps”, but they appear difficult to prove.

All directors and potential directors of companies need to be aware of the changes and take steps to mitigate their potential personal liability by ensuring PAYG withholding and superannuation liabilities are kept up to date. This particularly applies where cash flow in the company is tight and where certain directors may not be involved in the daily operations.

To avoid or minimise personal liability, directors of companies which cannot pay their superannuation and PAYG debts on time should seek advice from their accountant without delay.