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The Pendulum Swings a Little More Towards the ATO - New Director Penalties Regime
Summary
  • New director penalty laws are now in effect
  • These changes can have significant financial and other consequences for company directors
  • Directors, including those in the not-for-profit sector, need to quickly understand and comply with the new arrangements.
In May this year, legislation was proposed to expand the Australian Taxation Office’s (ATO) power regarding director penalty notices. Known as the Tax Laws Amendment Act (2012 Measures No. 2), the legislation received Royal Assent on 29 June 2012 and is now law.

The changes are part of Federal Government reforms to counter fraudulent activity by so-called phoenix companies, where companies are deliberately liquidated to avoid paying liabilities such as superannuation and taxes.

The new laws impose serious penalties for non-compliance on all company directors, not just phoenix operators. Directors – including those in not-for-profit organisations operating through companies – must mitigate their personal liability risk by effectively managing tax liabilities.
The major changes for directors
Under the new laws, directors face a series of new obligations and challenges, including:
  • being held personally liable for unpaid superannuation 
  • greater difficulty in wiping out personal liabilities 
  • the denial of PAYG credits in certain circumstances.
1. Directors are now liable for superannuation guarantee payments
The director penalty regime will be extended to superannuation guarantee (SG) amounts. This means company directors can now be made personally liable for a failure to pay employees’ SG amounts.

Previously directors could only be held personally liable for their company’s unpaid PAYG amounts – including estimates of PAYG liabilities.
2. Greater difficulty for directors to wipe out personal liabilities
Under the old laws, there were a number of ways directors could extinguish their personal liabilities in regard to PAYG or SG amounts owed. These were by paying the debt, appointing an administrator or winding up the company. On receiving a penalty notice, a director had 21 days to take any of these actions to avoid personal liability.

Under the new penalty regime, these laws continue to apply. But there is now an additional condition: if company liabilities remain unpaid and unreported three months after they were due, director penalties are not extinguished if companies are placed in administration or wound up. Directors will now be automatically held personally liable for all the amounts they owe.
3. Directors may now be denied PAYG credits
Under the old penalty regime, company directors and their associates (including family members and institutions) were entitled to PAYG credits on salaries, even if the company had not paid PAYG amounts to the ATO. Now, if a company owes PAYG amounts, PAYG credits may be denied to directors and associates.

But the consequences go even further. If these parties are paid wages, these wages will be grossed up as if no PAYG was paid on them and directors and others will be made personally liable for the amounts owing.
Directors face more changes
We have described the major changes for company directors above. But the new penalty regime presents other reforms for directors, including:
  • new directors are not liable for penalties for company debts until 30 days after they take on their role
  • the ATO can now estimate unpaid SG charges, in addition to estimating unpaid PAYG liabilities
  • the ATO can serve a copy of a director penalty notice on the director at his or her tax agent’s address. This creates an additional obligation for tax agents to provide advice on the effects of a director penalty notice.
How de Vries Tayeh can help
If your business has a tax debt, or you or your clients have received a director penalty notice, it is important to immediately seek professional advice.

If you don’t comply with the ATO’s notice, you could suffer serious consequences, such as losing personal assets including property, cars, shares and more. This could have a major impact on your company’s ability to function and your personal affairs.

de Vries Tayeh has 24 years experience in helping companies and their directors deal with issues such as these. Our staff can help you and your clients transition to this new regime.

As part of the changes, registered tax agents will now receive director penalty notices and need to develop standard advice around these notices. We can help you effectively meet your obligations to company directors on this issue.

For more information, please contact the authors of this paper:
 
Rory Muscat, Business Development and Relationship Manager
rmuscat@devriestayeh.com.au; (02) 9633 3333
 
Tibor Karolyi, Manager
tkarolyi@devriestayeh.com.au; (02) 9633 3333
 
Riad Tayeh, Partner
rtayeh@devriestayeh.com.au; (02) 9633 3333

July 2012
 New Director Penalties Regime