On 29 June 2012, changes were made to the tax laws to reduce the scope for companies to engage in fraudulent phoenix activity or to escape liabilities and payments of employee entitlements.
These changes protect worker’s entitlements and strengthen director’s obligations by:
• extending the director penalty regime and the estimates regime to apply to unpaid superannuation guarantee charge
• ensuring that directors cannot discharge their director penalties by placing their company into administration or liquidation when pay as you go withholding (PAYG withholding) or superannuation guarantee charge remains unpaid and unreported three months after the due date
• in some instances, making directors and their associates liable to PAYG withholding non-compliance tax (NCT), a tax equivalent to reducing PAYG credit entitlements where the company has failed to pay amounts withheld to the Commissioner.
The law has changed to address the following limitations:
• the director penalty and estimates regime applying only to PAYG withholding liabilities
• a director’s ability to achieve remission of director penalties by placing their company into administration or winding up within the director penalty notice period, irrespective of the length of time that the liability has gone unpaid and unreported
• a director’s ability to benefit from using PAYG withholding credits to offset their own income tax liability when the company had not paid withheld amounts to the Commissioner.
Extending the director penalty and estimates regime
A director penalty can now arise from amounts of unpaid superannuation guarantee charge that should have been applied for the benefit of the employee, by paying it to their superannuation fund.
Director penalty remission rules
The director penalty regime targets directors of companies that fail to meet their PAYG withholding obligations, including directors of fraudulent phoenix companies who often fail to meet their tax and superannuation obligations. The regime also seeks to ensure that if a company is unable to fund its tax obligations, the director promptly puts the company into liquidation or voluntary administration.
In order to recover a director penalty from a director, the Commissioner must issue a director penalty notice and wait until the end of 21 days after issuing that notice before commencing proceedings.
With one exception, a director penalty is remitted if, before a director penalty notice has been issued, or within 21 days after the issue of a director penalty notice, any of the following things happen:
• the company pays the liability
• an administrator of the company is appointed
• the company begins to be wound up.
The exception is that, since 30 June 2012, a director penalty won’t be remitted if the underlying liability remains unpaid and unreported three months after the due date unless the company pays its liability. That is, in those circumstances, the directors will not be able to avoid liability for a director penalty by placing the company into administration or winding up.
PAYG withholding non-compliance tax (NCT)
Before Royal Assent (29 June 2012) directors could use PAYG withholding credits (for amounts withheld from payments to them by the company) to offset their individual income tax liability, even when the company had failed to pay some or all of its PAYG withholding liability to the Commissioner. However, from 30 June 2012, directors and their associates are, in some instances, liable to pay the new NCT where their company has a PAYG withholding liability for an income year and the individual is entitled to a credit for amounts withheld by that company during the income year.
If your business has received a director penalty notice then you should seek the immediate advice of a tax lawyer. Here at The Quinn Group our experienced team can assist you with all aspects of dealing with your ATO debt. For more information on the recent changes, or on director penalties submit an online enquiry or call us on 1300 QUINNS (784 667) or on +61 2 9223 9166 to book an appointment.
