Directors Penalty for Non-payment of Super and PAYG Withholding

Timing is essential when it comes to managing a company’s finances.

Being on time with mandated payments and reports could mean the difference between alleviating an existing financial predicament and getting penalized, which is the case with the new rules affecting non-payment of superannuation and PAYG withholding for companies.

The amendments to company tax obligations can put directors at risk of being personally liable. This means, that failure to pay or lodge the Instalment Activity Statement (IAS) or Business Activity Statement (BAS) on time can lead to penalties and even jail time.

As the Australian Taxation Office (ATO) becomes more stringent with going after businesses that do not pay SGC and PAYG withholding, company directors need to be more mindful of settling these before the deadline or else risk taking money out of their own pockets to settle the obligation.

Understandably, several factors can affect a company’s capacity to make these payments—cash flow issues or the owners and directors are too busy with work—but these can’t be excuses for missing the deadline.

Director Penalty Regime

The Director Penalty Regime is designed to make company directors liable for unpaid SGC and PAYG withholding amounts. Once issued, the directors are given a specific time frame to do any of the following:

• make the payments;
• appoint a voluntary administrator to the company; or
• put the company into liquidation.

Previously, directors are able to avoid personal liability because of a three-month grace period where they can settle the payment or put the company in voluntary administration or insolvency within 21 days.

Under the Director Penalty Regime, the ATO also has the options to conduct garnishee proceedings to recover owed amounts, offset amounts owed against other tax credits, and initiate legal recovery proceedings.

But before the ATO can recover director penalties, it is obliged to issue a Director Penalty Notice (DPN) first.

ATO crackdown

Several changes have been made to the regime since its introduction in 1993, and the latest update mainly focuses on unpaid superannuation amounts. (See more about the amendment here.)

With the more rigid approach by the ATO on ensuring employers meet their obligations, companies will have to be more mindful of meeting these requirements because there is no more elbow room.

Now, directors will no longer be able to use the existing parameters to dodge accountability. Unpaid super and PAYG withholding amounts will now have to be paid on or before the deadline otherwise, the amount goes on “lock down” and puts the director personally liable.

This lock down aims to reduce the unpaid superannuation debt. The ATO estimates that this recent financial year, more than $100 million of SGC debt can no longer be recovered due to insolvent businesses.

Additionally, the ATO is now removing the 21-day timeframe within a company can be put into voluntary administration or insolvency—a tactic (referred to as phoenix activity) that allowed directors to previously avoid personal liability.

What happens now?

The Tax Commissioner can still exercise discretion when it comes to implementing the rules. These circumstances, however, must be taken into consideration:

• employer’s compliance history in terms of requirement to pay SGC and other tax laws;
• steps the employer has made to pay the unpaid SGC amount;
• if the amount of unpaid SGC is significant with regards to the size and nature of the business; and
• other matters the Commissioner deems relevant.

The ATO also has pointers for those who are no longer a director and about to become a director.
Avoid personal liability by ensuring your business meets all tax obligations. Our tax professionals may take the worry off your mind, so reach out to us and schedule a consult by clicking here.

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