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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Q & A – Superannuation Spotlight

Q : What Age Can You Access Your Superannuation Benefits?

A: Generally, your superannuation cannot be accessed until you reach your preservation age. This is the minimum age that you must reach before you are able to access your preserved superannuation benefits.

Legislation allows for the early release of preserved super benefits before preservation age in very restricted circumstances:

• Severe financial hardship;
• Compassionate grounds, for example pay for medical treatment for your or a dependant, modify your home or vehicle for the special needs of you or a dependant because of a severe disability, pay for expenses associated with a death;
• Temporary or permanent incapacity.

If you have ‘Unrestricted non-preserved benefits’ included within your superannuation entitlement, you can access this component at any time if your fund’s rules allow it.

Once you reach your preservation age, depending on your circumstances you can access your preserved superannuation benefit as follows:

1. If you retire (meet a condition of release), you can access your entire super as either a lump sum or an income stream (pension).
2. If you don’t retire, you can access your super as a transition to retirement income stream (TTR), but not as a lump sum. There are also restrictions around the maximum amount you can withdraw.
3. When you turn 65, you can access your entire super as either a lump sum or an income stream whether you are retired or not.

From 1 July 2015, the preservation age increases based on your date of birth.

Prior to 1 July 2015 preservation age was 55-years-old. Therefore, if you were born before 1 July 1960 you could access your superannuation benefits from age 55. However over the next ten years the preservation age is legislated to increase from 55-years-old to 60-years-old.

The increase in preservation age is not new legislation, however since preservation age has been fixed at age 55 for a number of years this increase may catch some people by surprise. It is important that you are aware of the age at which your superannuation can be accessed – accidentally accessing your superannuation entitlements before you are eligible could result in significant penalties.

The table below details preservation age based on your date of birth:

We recommend that you review your retirement plans as the increased preservation age means that you may have fewer years to employ a transition to retirement strategy which can provide you and your super fund with tax free benefits.

Under current legislation, please be aware that depending on your superannuation entitlement components, drawings from your super fund prior to reaching age 60 will be included as taxable income for you personally and will be taxed at your marginal tax rate.  Generally a 15% rebate will apply.

Those born after 30 June 1964 must now wait until 60-years-old to be eligible to access their superannuation. If you turn 55-years-old this financial year you cannot start a transition to retirement pension or access your superannuation until the 2017 financial year.

Please contact our Superannuation Manager Helen Cooper on 08 9316 7000 should you wish to discuss your specific circumstances in more detail.

Q: What happens to your superannuation when you die?

A: It is a common misconception that a person’s Will covers their superannuation benefit. A deceased person’s Will has no legal standing to deal with their superannuation benefit unless the member has a valid binding death benefit nomination directing their superannuation be paid to their Estate via the Legal Personal Representative of their Will.

Superannuation paid after a person’s death is called a super death benefit. When a person dies, their remaining superannuation balance, together with any life insurance benefit held within the superannuation fund, will be paid in accordance with their wishes if a valid binding nomination is in place.

Superannuation death benefit can only be made to ‘eligible persons’. Eligible persons includes your spouse, children (including adopted, step-children or ex-nuptial), any person you were in an interdependent relationship with or who was financially dependant on you at the time of your death and the legal personal representative of your estate.

If you wish to leave your superannuation death benefit to an individual who is not an ‘eligible person’, you can nominate the benefit be paid to your estate via your legal personal representative. The benefit can then be paid from your estate to the desired person.

In order to nominate a beneficiary the member needs to complete a beneficiary nomination form.

There are both lapsing and non lapsing binding nominations and non-binding nominations. In order to know what beneficiary nomination form is available to your superannuation entitlement/s, you should contact your fund provider/s and if you are a member of a self-managed superannuation fund you need to refer to the current Trust Deed.

Types of death nomination forms:

Lapsing: As the name suggest lapsing nominations expire after a certain amount of time.

• They are usually valid for a period of up to three years after the nomination was made
• For the nomination to remain current you must confirm the nomination in writing before the end of every three year period.

Non-Lapsing: A non-lapsing nomination does not expire.

Binding:

• If you have a valid binding death nomination in place, the Trustee or the legal personal representative must pay your superannuation benefit in accordance with the binding nomination.
• A typical binding death nomination will set out what proportion of the superannuation benefit is to be paid to each beneficiary.
• Having a binding death nomination in place provides certainty as to how your death benefit will be paid.

Non-Binding:

•  If you have a non-binding nomination is place, the Trustee can use the nomination as directions as to how the Death Benefit may be distributed.
• Ultimately, the Trustee retains controls and may use their discretion as to how to pay your superannuation death benefit.

Please be aware that there are different tax considerations depending on your superannuation components and who your beneficiaries are. If you require any further information please do not hesitate to contact our Superannuation Manager Helen Cooper on 08 9316 7000.

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