Australia: Personal Liability for Company Tax Debts - Key Changes - Consultation Closes 2 May 2012

The Government has released further draft legislation dealing with director liability for company tax debts. The proposed new rules will:

1. remove the ability of directors to have personal liabilities remitted by placing the company into administration or liquidation where PAYG withholding or superannuation guarantee amounts have been unpaid for more than three months;
2. expand the director penalty regime to include superannuation guarantee amounts;
3. create a defence for directors where the Commissioner decides that superannuation was not correctly paid by the company if, for example, reasonable care was taken to arrive at the correct position; and
4. restrict access to PAYG withholding credits or company directors or their associates if the company has failed to pay withheld amounts to the ATO. This new draft legislation follows on from the government's November 2011 withdrawal of another bill containing tax laws targeting directors, in the face of widespread criticism of its far reaching operation. The new draft legislation is open for consultation until 2 May 2012.

Existing rules

The existing director penalty regime operates by making directors automatically liable for any PAYG amounts that a company does not pay to the ATO on time. Before legal action is taken to recover directors' personal liability the Commissioner must issue a notice to the director. This notice process allows personal liability to be avoided if, amongst other things, the company is placed in liquidation or has a voluntary administrator appointed within 21 days.

Debts outstanding for more than 3 months

The new draft bill provides that director penalty notices must be issued in every case where the Commissioner wishes to take court action to recover director penalty amounts (but probably not where he wishes to use his administrative powers, such as the power to garnishee bank accounts). The new rules then go on to say that if a company's tax debts have been outstanding for three months or more the director will not be able to avoid personal liability by placing the company into administration or liquidation.

This is a major policy change. It will mean that directors are effectively strictly liable for company tax debts which have been outstanding for three months or more, regardless of whether or not the Commissioner has issued a director penalty notice, and (apparently) regardless of whether or not the company has been placed into liquidation or had a voluntary administrator appointed before a notice is issued.

New directors

The draft bill includes a proposal that new directors will have the chance to avoid personal liability if they resign within 30 days of appointment, rather than the current 14 days.

SGC uncertainty

The extension of the director penalty regime to superannuation guarantee amounts has generally been accepted as a valid response to Phoenix operators, but it has been criticised because of the risk, at least at the margins, that directors of companies which are good corporate citizens will become personally liable for superannuation guarantee amounts where, because of the complexity of the tax laws, contractors are really getting a windfall.

A company may enter into a contract to pay a contractor $100 per unit, on the basis that the contractor will look after their own superannuation and taxation affairs. The Commissioner may decide at some later time (perhaps four years after the event) to rewrite the contract to say that the company was obliged to pay the contractor $100 plus $9 superannuation per unit. The contractor will receive a windfall and directors will be personally liable for that extra $9 per unit.

The draft legislation tries to address this inequity by providing a defence to director liability for superannuation guarantee amounts if, and only if, the company took reasonable care in addressing the superannuation guarantee obligations and had a reasonably arguable position that the view of the law taken by the company was correct. Ignorance of the law will not be enough. The company must take into account the Commissioner's rulings, case law and other relevant material to decide whether or not particular payments attracted superannuation guarantee obligations. In practical terms, the best method of proving that reasonable care was taken may be to obtain a written opinion about the superannuation guarantee position.

Retrospective operation

Hidden away in the fine print of the draft legislation are provisions which will apply some of the new rules to "old" company debts.

This means that directors of every company in Australia which has PAYG withholding liabilities that have been outstanding for more than 3 months at the date the legislation is enacted will effectively be strictly liable for those amounts. Unlike the current regime, putting the company into liquidation or voluntary administration within 21 days after a director penalty notice has issued will not cause the personal director penalty to be remitted.

Managing risk

The existing director penalty regime is notorious for its hidden traps, extremely short windows for action to avoid liability and general community ignorance of its existence.

The tortuous process of "consultation" on changes to the director penalty regime has already covered a lot of ground, shifting from proposals that no notice needs to be issued where debts have been unreported for more than 3 months to the current suggestion that notices must be issued in every case, without however affording a director the opportunity of avoiding personal liability by complying with the notice within the specified time if the debt has been unpaid for three months.

Unfortunately for company directors and advisors alike, the risk of personal liability means that putting director penalty risks in the too hard basket can be a sure-fire recipe for disaster.

Directors of any company with outstanding PAYG withholding liabilities over three months old must review their positions, with a view to taking steps to manage personal liability before the new legislation is enacted.

Likewise, every company that makes contractor payments without accounting for superannuation contributions should satisfy itself that its position is reasonably arguable or run the risk that directors will effectively be strictly liable for any superannuation guarantee amounts.

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This report does not comprise legal advice and neither Gadens Lawyers nor the authors accept any responsibility for it.