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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Pay-roll Tax – A Guide for Employers

Pay-roll Tax is a state based tax assessed on the wages paid by an employer in Western Australia. The tax is administered by the Office of State Revenue, and has seen several changes to the legislation take affect recently which employers may not be aware of.

Threshold

The first major change is the lifting of the pay-roll tax threshold as of 1st July 2014 from $750,000 to $800,000. For monthly lodgers, this means an increase in the threshold from $62,500 per month to $66,667 per month from 1 July 2014.

Pay-roll Tax Rates Effective 1 July 2014

Monthly Wages                    Annual Wages ($)                   Tax Rates (%)
$0 – $66,667                     $0 – $800,000                             Nil
Over $66,667                     Over $800,000                             5.5

It is important to note that pay-roll tax rate of 5.5% is only applied to the balance of taxable wages above the applicable threshold. For example, if your taxable wages for the 2015 financial year total $850,000, the 5.5% tax rate is applied to the $50,000 and hence a pay-roll tax liability of $2,750 would arise.

Definition of Wages

All payments to workers including wages, salaries, leave entitlements, commissions, bonuses, allowances, directors fees, employee fringe benefits and superannuation contributions are wages subject to pay-roll tax.

Certain contracting arrangements may also be captured under the definition of wages, if the contractor is engaged under a contract of service.

The following payments are also captured under the definition of wages for payroll tax purposes:

• Portable long service leave
• Employee share acquisitions
• Industry redundancy funds
• Payments to employment agents
• Termination payments

Please note that the list above is not exhaustive, and if you are unsure if a particular employee entitlement is subject to pay-roll tax, please contact one of our team.

Exempt Payments

The following payments are excluded from the calculation of taxable wages for pay-roll tax purposes:

• Wages paid in the first two years of employment to new employees with a disability, for whom the employer receives or is entitled to receive a wages subsidy under the Commonwealth Government’s Disability Employment Services Program, or the Western Australian Disability Services Commission;

• Payments to apprentices (including trainees) under a training contract registered under Part 7 of Division 2 of the Vocation Education and Training Act;

• Payments to employees under the provisions of the Workers Compensation and Injury Management Act 1981;

• Payments to employees who are absent in the defence forces;

• Parental leave from 1 July 2009 (includes maternity, parental and adoption leave);

• Payments to volunteer emergency services workers;

• Wages paid to an employee in Western Australia are exempt where the wages are paid in respect of services performed by the employee wholly in another country, for a continuous period exceeding six months;

• Reasonable motor vehicle allowances, to the extent that they do not exceed the Australian Taxation Office’s (‘ATO’) large car rate;

• Accommodation allowances up to certain limits. These limits reflect the ATO rates for reasonable travel allowance amount for lowest salary / lowest city rate, or by an amount prescribed.

Registering for Pay-roll Tax

An employer or a group liable for pay-roll tax must “Register as an Employer” with the Office of State Revenue within seven days of the close of the month in which wages exceed $66,667 in a month.

Following registration, a return declaring wages paid must be lodged together with the tax payable within seven days of the end of the month to which the return relates. June monthly and annual returns are due for lodgment and payment by 21 July.

Here at GeersSullivan we handle many of our clients’ monthly and annual pay-roll tax reporting obligations. Please give one of our team a call to discuss your pay-roll tax registration or lodgement requirements.

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