Being a company director should not be taken lightly.
It comes with significant responsibilities and financial risks.
For example, Company directors can now be personally liable for unpaid superannuation and PAYG withholding.
The Australian Tax Office (ATO) has had the ability to make company directors personally liable for unpaid PAYG withholding, under the 'director penalty regime'.
On top of that, the Taxation Commissioner can now (since 1 July 2012) make directors personally liable for any unpaid superannuation.
A concern with these new rules is that when a PAYG withholding or superannuation liability remains both unreported and outstanding for over 3 months, there is no way for a director to avoid personal liability.
The ATO will still issue a 'director penalty notice', however many directors may not be aware of an unavoidable personal liability until it’s too late.
As a director when do you become personally liable?
If you are a director of a company and the company does not pay its PAYG withholding and superannuation debts by the due date, the ATO may issue a 'director penalty notice'.
The resulting notice may be issued to all of the directors or just one of the directors for the full amount of the liability.
As a director of the company you then have only 21 days to respond to the notice.
After the end of the 21 days the ATO may commence legal action against you personally as a director to recover the debt. The notice may be issued to a director’s residential address or that of the tax agent.
How can you avoid personal liability when you respond to a ‘director penalty notice’?
If you receive a director penalty notice then personal liability may be avoided if you do any one of the following:
the company pays its outstanding debt within 21 days an administrator is appointed to the company within 21 days the directors commence winding up of the company within 21 days
The new rules are similar to the old regime, with one very important difference…
If a debt remains unpaid and unreported for more than 3 months after the due date then as a director you can only avoid personal liability by ensuring the company pays the outstanding debt.
A potential trap for newly appointed directors
Another very important area if you become a new director of a company: You will have 30 days to make yourself aware of a company’s PAYG withholding and superannuation liabilities or a no-liability period of 30 days. However after this 30-day period as a new director you may receive a director penalty notice for the amounts payable before your appointment.
Will you still be liable if you place the company into administration?
This extinguishment is limited by the new legislation whereby a director will not avoid personal liability by placing the company into administration or liquidation if three months has lapsed since the due date of the company’s liability and the liability remains unpaid or unreported.
New directors are not subject to these more limited remission options until three months after they become a director of a company (rather than three months after a debt arose).
The new legislation has also increased the ATO’s ability to collect from directors and associates any amounts of PAYG withholding that have not been remitted to the ATO. A director and associate may be prevented from claiming PAYG withholding credits should personal liability be imposed. This extends to former directors where PAYG was unpaid during their period of directorship.
In addition, directors and their associates who are entitled to PAYG withholding credits may be liable to pay PAYG withholding non-compliance tax essentially cancelling the benefit of any such PAYG credits.
This effectively stops directors and associates from claiming PAYG withholding on wages paid to themselves in their personal tax returns. This will be quite a surprise for a director or associate expecting a refund on lodgement of their personal tax return and ending up with tax payable.
6 Things You As A Director Can Do To Protect Yourself
As a Director what can you do to ensure you are not affected by these rules?
- As a director of a company you should ensure all the company’s PAYG withholding and superannuation obligations are lodged and paid on time, or at least no more than 3 months after the due date.
- As a director of a company should review your employees and contractors to ensure that you are meeting your PAYG withholding and superannuation obligations.
- Make sure that the directors residential address reported with ASIC is correct in case a notice is issued. Not being aware of an issued notice could be extremely costly!
- Where the company of which you are a director has not paid sufficient superannuation by the end of a quarter, the Superannuation Guarantee Charge must be reported in the form of a 'Superannuation Guarantee Statement' to the ATO, or at least within 3 months of the due date.
- CRUCIAL: Review your personal assets and seek structural advice to ensure they are sufficiently protected or otherwise not held in directors’ names.
- As a new director of a company you should immediately (within 30 days) request and review the company’s prior PAYG withholding and superannuation.
Complacency could be costly
Ensure the companies you act as a director for or your own company business is in a strong position to pay all its obligations on time. This requires consideration of not only the financial ability, you should also consider the administration functions and processes are in order to ensure of the company has good internal control for reporting and lodgement.
Your next step…
If you have not undertaken an asset protection review with us to establish whether your personal assets are at risk in the event of receiving a director’s penalty notice, you should take action on this immediately. Prevention is always better than cure. Likewise, if your asset protection structures have not been reviewed for some time, and there have been changes in your life regarding marriages, directorships and other significant changes, your personal assets could now be at risk.
For more information on undertaking an asset protection review or to arrange a meeting, please contact your relationship manager at NCA.
Your investment in asset protection structures is very small compared to your asset base it will protect.