Contributed by Jack Stuk, National Tax Partner, KHQ Lawyers and President, NTAA Ltd and Jonathan Slade, Lawyer, KHQ Lawyers
The government has progressed legislation through parliament which will extend the penalties and enforcement measures applying in relation to superannuation guarantee charge (SGC), PAYG withholding tax and GST, including imprisonment.
These new measures are contained in the Treasury Laws Amendment (2018 Measures No 4) Bill 2018, which received assent as Treasury Laws Amendment (2018 Measures No 4) Act 2019 (Act No 8 of 2019) and the Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019, which is currently before parliament.
As outlined below, the government is getting particularly tough on compliance with the superannuation guarantee system, as wayward employers may now be punished with potentially drastic penalties for not abiding by their obligations.
If the second Bill is passed, directors of both public and private companies will also become personally liable for their outstanding GST debts, upon non-compliance occurring.
The amendments highlight the need for company directors to ensure their current and future assets (eg inheritances) are adequately protected if the ATO makes a claim against them personally. This is particularly important where a rogue co-director engages in tax subterfuge thereby unwittingly ensnaring the rest of the board with civil liability for the same.
Treasury Laws Amendment (2018 Measures No 4) Act 2019: Directions and penalties in relation to superannuation guarantee charge
The amended legislation provides the Commissioner with powers to pursue criminal penalties for serious contraventions of employer superannuation guarantee obligations, including potential jail time for individual employers or directors of a company (including a trustee company) that employs staff.
Previously, the law only allowed the Commissioner to collect financial penalties, including the superannuation guarantee charge and interest (ie 10% nominal interest and the general interest charge (GIC)), from an employer and a company director of an employer if he, she or they did not cause their corporate employer to pay their employees’ super on time and in full.
New ATO process
In order to impose the new penalties, the Commissioner must follow the process below:
- First, the Commissioner needs to direct (in writing) an employer to pay any outstanding SGC amounts (or estimated amounts). In deciding whether to issue a formal direction, the Commissioner must have regard to the taxpayer’s history of compliance with SGC, tax law, whether the liability is substantial, any steps taken to discharge the liability, and the like. The direction will set out certain details, including the requirement that the superannuation liability is satisfied within 21 days after the direction is given to fix the issue.
- The Commissioner is then empowered to seek court-ordered penalties if an employer fails to comply with the direction within the specified time. If the employer fails to comply with its director(s) and if more than one all jointly and severally will then be faced with financial penalties, or imprisonment for up to 12 months, or both.
An employer will only be able to avoid the penalties if it can show that the employer took all reasonable steps to comply with the Commissioner’s direction or discharge the liability before the direction was issued. This defence has failed many times in relation to director penalty notices issued for PAYG against directors personally (Roche v DFC of T  WASCA 196; DFC of T v David John Holton  VCC 516) so there is no leeway for individuals who are simply tardy or careless when it comes to complying with their obligations.
Under the new legislation, the Commissioner will also have the power to direct an employer who has failed to comply with their superannuation guarantee obligations to undertake a specified course of education.
The Commissioner’s power to issue these directions and the penalty provisions take effect on 1 April 2019 and will apply to all outstanding SGC liabilities that became payable from 1 July 2018.
Treasury Laws Amendment (2018 Measures No 4) Act 2019: Compliance measures to enhance the director penalty notice regime
Previously, the Commissioner could request a security deposit (by way of a bond, deposit or any other means the Commissioner considered appropriate) on account of an existing or future tax or superannuation liability from an entity that it believed may soon cease carrying on a business.
The ATO had experienced difficulty seeking compliance with these security requests.
Enforcement of security deposits — existing or future tax-related liability
The amendments in Treasury Laws Amendment (2018 Measures No 4) Act 2019 bolster the Commissioner’s powers to demand a security deposit from an entity, by enabling the Commissioner to seek a court order compelling the entity to provide the security. If the entity then fails to provide the security following the granting of a court order, it will then be subject to financial penalties, with sole traders and the directors of corporate employers liable, imprisonment for up to 12 months, or both.
The entity will only be able to avoid the penalties if it can show it is unable to comply with the security order of a court if the request by the ATO is not satisfied, eg, because it entered into voluntary administration or insolvency.
This amendment applies to requests for security made by the Commissioner from 1 July 2018.
Circumstances where a director penalty is remitted and the “lock down” rule — SGC
Previously, a director could be held personally accountable for his or her company’s unpaid and overdue superannuation guarantee charge and PAYG withholding liabilities.
A limitation of the director penalty notice regime for unpaid PAYG withholding and SGC debts, was that a director could avoid personal liability by liquidating their company before the penalty was “locked down”.
They may have achieved this by exploiting existing provisions that allowed director penalties to be remitted. Under the legislation prior to amendment, a director penalty would have been remitted if:
- the liability was discharged within the 21-day penalty notice period; or
- the director placed the company under administration or wound up the company within the 21-day penalty notice period and within three-months of the due date for the payment of the company’s underlying liability.
“Locked down” — 3-month rule
The director penalty was “locked down” once the three-month period had passed and the penalty could no longer be remitted. A director may have therefore waited until just before the “lock down” date to place their company under administration or wound it up so the director was released from paying the corporate employer’s tax and penalties.
To address this mischief, a director penalty in relation to an unpaid superannuation guarantee liability (eg 9.5% of relevant remuneration) will now be “locked down” as soon as they are incurred — that is, the three-month period before director penalties are “locked down”.
The impact of this change is shown in the following example:
Susie is the director of a company that employs say 10 staff. The company fails to pay superannuation contributions for its employees for the quarter ended 31 March 2019, and neglects to lodge the superannuation guarantee statement and to pay the superannuation guarantee charge by the due date, being 28 May 2019. On 1 August 2019, the company is placed into voluntary administration.
On 30 August 2019, the Commissioner issues Susie with a Director Penalty Notice for the outstanding SGC liability.
Under the current law, the director penalty notice issued to Susie was capable of being remitted. Susie would have had until 28 August 2019 to avoid personal director liability under the Director Penalty Notice for SGC and PAYG (if any).
Under the new legislation, the penalty is not capable of being remitted because the company was placed under administration after the SGC liability was due for payment. Susie would have to have appointed a voluntary administrator on or before 27 May 2019 to avoid personal liability for SGC under a Director Penalty Notice.
This measure is designed to reduce the amount of SGC that is irrecoverable due to “staged” corporate insolvency.
This amendment applies to amounts arising on or after 1 July 2018.
3-month rule — PAYG & GST
Interestingly, the three-month rule is retained for PAYG withholding liabilities, and for the corresponding proposed provisions applying to outstanding GST liabilities in the second Bill currently before Parliament (discussed below).
Penalties relating to estimates — SGC & PAYG
The current law enables the Commissioner to estimate unpaid amounts of PAYG withholding and SGC and recover the amount of those estimates from taxpayers.
Because the date of the obligation to pay the estimate is sometimes long after the date of the obligation to pay the original liability, a director may place their company into administration or liquidation to avoid paying the liability.
The new legislation prevents a director from exploiting the timing difference between when unpaid SGC or PAYG withholding liability arises and when the obligation to pay an estimate of the liability arises.
It does so by changing the date a director commences being under an obligation to ensure their company complies with its obligations to pay an estimate or enter administration or liquidation by backdating the obligation to pay SGC or PAYG withholding amounts to the day that the underlying SGC or PAYG amount was due (regardless of when the Commissioner issues the estimate of the unpaid amount).
A director will now no longer be able to avoid personal liability in relation to estimates of unpaid and overdue SGC and PAYG withholding amounts, by placing their company under administration or liquidation long after the original liability arose but before the obligation to pay the corresponding estimate becomes due.
The legislation has been further amended to make certain that a liability to pay a director penalty which is based on an estimate applies even if the underlying liability never existed or has been discharged in full, and that the director penalty applies even if it is larger than the underlying liability.
This amendment applies to Commissioner’s estimates made on or after 1 July 2018.
Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019: GST personal director liability
The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 introduces, among other things, several amendments concerning the GST obligations of a company. In particular, it extends the director penalty regime to outstanding GST liabilities of the company.
Director penalties in relation to GST liabilities
At present, if a company does not meet its PAYG withholding and SGC obligations, the Commissioner may recover these amounts personally from a director(s) of the company, via a Director Penalty Notice(s).
The Treasury Laws Amendment (Combating Illegal Phoenixing) Bill 2019 will extend the director penalty regime to GST liabilities as well. If passed, it will allow the Commissioner to make company directors personally liable for their companies’ unsatisfied liabilities to pay assessed net amounts and GST instalments, LCT (Luxury Car Tax) and WET (Wine Equalisation Tax).
The amount of the penalty is the same as the amount of the company’s unpaid tax obligations.
A director penalty may be remitted in the same circumstances that PAYG withholding liabilities (and until now SGC liabilities) may be remitted. If the second Bill is passed, the amendments will apply to outstanding GST, LCT and WET liabilities arising immediately after the commencement of Sch 5 to the Treasury Laws Amendment (2018 Measures No 4) Act 2019, which is 1 April 2019.
Estimates of GST liabilities
The proposed amendments will also allow the Commissioner to collect estimates of anticipated GST, LCT and WET liabilities, as he is currently able to do this for PAYG withholding and SGC liabilities.
Retention of tax refunds
The proposed amendments will also authorise the Commissioner to retain tax refunds where a taxpayer has failed to lodge a return or provide other information to the Commissioner that may affect the amount the Commissioner refunds. This is designed to ensure taxpayers satisfy their tax obligations and pay outstanding amounts of tax before being entitled to a tax refund.
The date of effect of this amendment is the first day of the quarter following Royal Assent.
The above amendments arm the Commissioner with the ability to pursue stronger penalties against an employer, being an individual or a company and its directors.
Phoenixing activities that may have previously enabled directors to avoid their obligations will no longer be effective.
It is therefore important for a director of a company with two or more directors to review their asset protection arrangements as soon as possible in case they are personally targeted by the Commissioner because their company, perhaps through the nefarious activities of one or more rogue director(s), has not met its corporate tax obligations.
[This article was originally published in CCH Tax Week on 1 March 2019. Tax Week is included in various tax subscription services such as The Australian Federal Tax Reporter and CCH iKnow. CCH Tax Week is available for subscription in its own right. This article is an example of many practitioner articles published in Tax Week.]