If you are a director of a business, you can become personally liable for unpaid Pay As You Go Withholding (PAYG) tax and Superannuation Guarantee Charge (SGC).
The fact that you are not an executive director ie not involved in the day-to-day management of the business, is irrelevant. Tax compliance is part of your duties as a director of a company.
Directors’ Personal Liability For Business Taxes
The Australian Tax Office (ATO) has long had the power to make directors personally responsible for unpaid PAYG withholding tax but directors could get themselves off the hook if (a) the company paid up the amount, or (b) the company is put into administration or liquidation within 21 days of the ATO issuing a director penalty notice.
However, the ATO’s powers were significantly increased with effect from 30 June 2012. In particular:
- Directors can now also be personally liable for unpaid superannuation amounts, not just PAYG withholding amounts; and
- If the amounts are not reported and not paid within 3 months of the due date, directors will remain personally liable for these amounts even if the business is put into administration or liquidation. These are referred to as the “lockdown” directors penalties.
The only way to avoid personal liability is for the business to pay these amounts. As a director of a business, you can’t run or hide from ensuring that your business meets these tax obligations. Failure to file the required statements to avoid attracting the attention of the ATO doesn’t solve or defer the problem of non-compliance with the tax obligations. Neither does winding up the business. Hence the term “lockdown” directors penalties.
The extension of personal liability to unpaid superannuation makes contractor arrangements a significant risk issue for directors. This important issue was highlighted at a recent Chartered Secretaries Australia Compliance Discussion Group on the topic of Directors’ Obligations and Duties. Teresa Torcasio (Partner) and Laura Young (Senior Associate) of HWL Ebsworth, Lawyers noted that where a business engages a contractor but the ATO classifies the legal relationship as that of an employee, then, the business is liable for superannuation from the date of the engagement. This can result in an unexpected massive unpaid superannuation liability for the business, for which directors can be personally liable.
There is also a new PAYG withholding non-compliance tax (“NCT”) under the new regime. The NCT applies to directors and their “associates” and in effect reduces the individual PAYG credit entitlements if the business has not paid the PAYG withholding tax.
Tax compliance is part and parcel of directors’ duties. It is your responsibility as director to ensure that the business meets its tax obligations. If you are considering taking on the role of a director for a business, include a review of the business’ tax compliance systems as part of your due diligence. For new directors, the 3-month clock starts ticking from the date you become a director, not the date that the debt arose.
Mitigating Risk Of Personal Liability for Business Taxes
- Sound Systems & Processes
- Robust record keeping and accounting systems and processes are essential for all business. There’s no doubt that regulatory compliance is time consuming. Sloppy business practices make compliance even more difficult and you also run the risk of things end up slipping through the cracks.
- Diarise all regulatory compliance dates for the next 12 months in a place which is clearly visible (e.g. a wall calendar) or as a report that is regularly reviewed e.g. a compliance and governance timetable. This allows planning well ahead of time to meet the deadlines instead of doing a last-minute scramble.
- Actively monitor tax compliance. Don’t just assume it’s been done. Make sure you read and understand the financials of the business. Timely review of the financials allows for early problem recognition.
If your business uses contractors, get lawyers to review all your contractor arrangements to ensure that they are compliant with ATO requirements.
Cash flow planning is also vital to ensure you have the funds to meet the tax payments as and when due. Taxes like PAYG withholding and superannuation charge often end up being used to fund working capital requirements. The tax payment cycle can create severe stress to the business cash flow when it comes time to remit these amounts to the ATO.
It’s essential to do 3-way monthly forecasts as well as rolling weekly forecasts for sound cash flow management. Watch this video to see why you need to use this dual approach to cash flow planning.
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