Directors’ Liability for Unpaid Superannuation

The director penalty regime has been in place since 1993 and most directors have at least a “working knowledge” of how the provisions operate and when they could become personally liable for the pay as you go (PAYG) withholding tax liabilities of their company. However, from 30 June 2012, the director penalty regime was expanded to include the superannuation guarantee obligations of the company, as well as restricting the application of some of the statutory defences.

The purpose of these reforms was to protect employee entitlements.

Who can be liable under the regime?

The following persons can be liable under the director penalty regime:

• Directors at the time the ATO sends out the notices (even if they weren’t directors at the time the obligation arose);
• Directors at the time the obligation arose (even if they are no longer directors);
• Alternative directors; and
• “shadow directors”.

What can Directors be held liable for?

In addition to PAYG withholding amounts, the director penalty regime, from 30 June 2012, applies to unpaid superannuation guarantee payments. Directors become liable for such superannuation guarantee payments on the day the company must lodge its superannuation guarantee statement.  This is on the 28th day of the month after the end of a quarter.

So, for example, for the quarter ending 30 June the lodgement day is 28 July. Therefore, directors can be liable from that date for the company’s superannuation guarantee charge relating to the June quarter.

The liability includes not only the company’s superannuation obligations (for the 2014/15 year, being 9.5% of the employee’s ordinary times earnings), but also an interest component (10% p.a.) and a penalty component ($20 per employee per quarter).

Defences

A director has broadly three defences:

• commence winding up the company within 21 days of receiving the notice (this has now been modified, as discussed below);
• establish, because of illness or some other valid reason, the director did not take part in the management of the company at the time when the company incurred the withholding obligation; or
• the director took all reasonable steps to ensure the directors complied with their withholding obligations.

A new defence has been added that will ensure that a director is not liable to a director penalty relating to the superannuation guarantee charge, where they can establish that the penalty resulted from the company treating the Superannuation Guarantee (Administration) Act as applying to a matter or identical matters in a particular way that was reasonably arguable. In addition the director must show the company took reasonable care in connection with applying the Superannuation Guarantee (Administration) Act to the matter or matters.

For example, the company could take a view that certain persons are contractors and therefore the company does not need to make superannuation guarantee payments in respect to them. If the ATO, or the Courts, subsequently find that the persons were covered by the Superannuation Guarantee legislation, and that superannuation contributions should be made on their behalf, then, although the company will remain liable for the superannuation guarantee charge, directors will not be liable; provided that the view taken by the company was reasonably arguable and the company took reasonable care in relation to its superannuation guarantee obligations.

The “wind up defence”

The ability of directors to avoid director penalty obligations by winding up the company has been restricted to a period of three months after the debt is incurred. After that three month period the only way a director will not be liable for the company’s withholding or superannuation guarantee obligations is to pay the debt or satisfy one of the other two defences (ie the winding up of the company will not absolve the director of the penalties).

So to continue the example set out above, where a director becomes personally liable for the June quarter superannuation guarantee obligations, on 28 July, the “wind up defence” will lapse three months later (ie on 29 October).

New directors “grace periods”

New directors have two “grace periods”. First, they will not be liable for either PAYG withholding obligations of a company, or the superannuation guarantee obligations of a company, for the first 30 days of their appointment. This gives a new director time to conduct due diligence on the company and resign if necessary. If the director does not resign within that 30 day period then the director will be potentially liable for both past and present PAYG withholding and superannuation guarantee liabilities of the company.

Discretion to reduce PAYG withholding credits for directors and their associates

The Commissioner of Taxation has been granted the discretion to reduce credits for tax withheld from the salary of directors and their associates. So for example, if a company has withheld $15,000 of tax from a director’s fees, the Commissioner has the discretion to reduce those credits, with the effect that the director will have to pay full tax on his or her director fees (even though that tax has previously been taken out of the director’s fees).

What should Directors do?

Directors must ensure that their company has met all of its PAYG withholding and superannuation guarantee obligations on an ongoing basis. Where directors do not have day to day control of the company, they should ensure that management regularly confirms that the company’s PAYG withholding and superannuation guarantee obligations are met.

Where directors become aware that the company’s PAYG withholding and/or superannuation guarantee obligations have not been met, they should ensure that within the three month period after the liabilities arose, that either the liabilities are paid or that the company commenced to be wound up. If they fail to do this then unless one of the limited defences apply, the directors can be liable for those liabilities.

New directors should ensure that they conduct proper due diligence before or soon after their appointment. If that due diligence shows up unpaid PAYG withholding or superannuation guarantee liabilities, or the director cannot satisfy herself/himself that all liabilities have been met, the director should strongly consider resigning within the first 30 days of their appointment to ensure that they are not personally liable.

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Negative Gearing

It has been nigh on impossible recently to pick up a paper or open a news website without seeing an article or opinion on negative gearing.  If all opinions are to be believed, this is simultaneously the greatest public enemy since communism and the sturdy ladder by which the hard working Australian slowly drags themselves up another rung.

With so many opinions and scare campaigns being touted by both sides of politics, it has become increasingly difficult to actually find anything out about negative gearing.

Gearing is the name given to the practice of borrowing funds to use for investment. For example if I have $10,000 and choose to borrow another $40,000 and invest that money in the share market, I have a geared investment. An investment is referred to as being positively geared where the income from that investment – so in my case dividends from my shares – exceeds the costs of holding that asset. In my example the costs to hold the asset will be the interest I pay on my loan.  If the holding costs exceed the income derived from the underlying investment then my investment is negatively geared.

So why would I do this?

In the simplest of terms I am hoping to make a capital gain when I eventually sell my investment that exceeds my losses. For example I sell my share market investment after three years for $60,000; as the table shows I have made money on my investment despite having to put in $500 each year to cover my interest bill.

So where does the controversy come from?

Under Australian tax law I am able to offset the $500 loss I was making each year against my other income including my salary. This means I will have less assessable income and pay less tax. If we assume my tax rate was 40% I am paying $200 less tax a year.

But why is this controversial? It is readily accepted that you can deduct the cost of buying uniforms or using your car for work and the Government doesn’t have an issue with that cost. So why the outrage? What makes negative gearing so different to any other loss or outgoing?

To answer that question we need to consider the application of the Capital Gains Tax Discount. Broadly speaking the discount reduces the taxable gain made when an investment is sold by 50% as long as the asset has been owned for over 12 months.

In relation to my parcel of shares that I held for three years I will only pay $1,400, an effective tax rate on my cash profit of 15%.

The changes proposed to tackle negative gearing are:

The Labor Party believes the answer is to only allow negative gearing on newly built houses. To be fair to existing landlords, any property that is already rented will also be allowed to continue to be negatively geared, a concept called grand fathering that is fairly common when taxes are reformed. Labor also plans to reduce the CGT discount so that there is less of an incentive to take on the gamble I have discussed above.

The Liberals have been more coy with their proposal and nothing is concrete yet however we should expect to see either a limit placed on the amount of losses that can be claimed each year or the number of properties that can be geared.

There are also a number of other proposals that have been put forward by various vested interests including:

• Do nothing, everything is fine the way it is
• Only allow investment losses to be offset by other investment income (quarantining)
• Reduce the CGT discount only, leaving negative gearing untouched
• Not allowing business or investment losses to be offset against salary and wages

Each of these has some merit and will likely be foisted upon us as the saviour as some point in the coming months. But until then I would like to conclude with the sobering thought that the Australian dream of owning your own home has become very expensive; any changes to the current system may ostracise investors resulting in their exit from the property market. The resulting devaluation of property is something both sides only want in moderation, even those pushing it as an agenda, as anything more could threaten our economic recovery for years to come.

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