Company director personal liability set to be expanded
The personal liability of company directors for withholding of PAYG and Superannuation Guarantee (SG) amounts from employee wages will be increased under a proposed change to the law.
On 5 July 2011, an Exposure Draft of a bill was released to strengthen the operation of the director penalty notice regime, following the announcement of the change in the Federal Budget on 10 May 2011.
The changes are intended to protect workers' entitlements to compulsory employer superannuation contributions and to address aggressive tax activities (mainly "phoenix" activity involving companies). However, the changes will apply more broadly, creating an increased personal liability risk for all directors of companies with paid employees, or contractors who principally provide their labour for whom SG obligations therefore apply.
Importantly, these changes can also expose directors to personal liability where the company has under-reported PAYG or SG withholding amounts because it has taken the view that a person is a contractor and not an employee (or a contractor for whom SG obligations apply), if that view is later proven incorrect.
The changes will take effect once the Bill is enacted, expected to be before the end of 2011.
Key aspects of the proposed changes
- The director penalty regime would be extended to make directors personally liable for their company's unpaid SG amounts (in addition to unpaid PAYG amounts)
- The ATO will be allowed to immediately commence recovery action if the company's liability remains unpaid and unreported three months after the due day
- After a company's liability remains unpaid and unreported for more than three months, a director's personal liability could only be extinguished by payment of the debt or penalty (placing the company into liquidation will not be sufficient)
- The ATO will have the discretion to prevent directors and their associates from accessing the PAYG withholding credits on their own salaries if the company has an outstanding PAYG liability
- A new director can become personally liable for the company's outstanding PAYG and SG liabilities after 14 days from the time they commence as director of the company.
Implications for directors
While the changes are targeted at directors engaging in "phoenix" activities, the ATO's new powers reaffirm the importance of directors being aware of their company's employee and contractor tax obligations. Directors should review their company's superannuation obligations in respect of contractors and ensure processes are in place for the payment of SG obligations and for the withholding and remission to the ATO of PAYG amounts.
As always, advice should be sought and action taken urgently upon the receipt of a director penalty notice.
Outcomes from the recent Federal Government tax forum
Tax-free threshold lift to $21,000
The government is promising to increase the tax-free threshold to $21,000, another $2,800 lift from its proposed tax free threshold of $18,200, announced with the carbon tax package on 10 July 2011.
The increase to $21,000 could potentially deliver a tax benefit of $500 a year for someone on $60,000 taxable income. However, the low-income tax offset will be removed entirely to compensate for this. Treasurer Wayne Swan did not set a timeline for the proposal.
More harmonization of state tax
State governments have called for greater harmonisation of state taxes such as payroll tax and land tax. The harmonisation of state tax legislation means that although each jurisdiction continues to have different tax rates and general deduction thresholds, the tax legislation is virtually identical. This allows the relevant revenue offices to consult one another and share relevant taxpayer information in determining private rulings and objection matters.
Establishment of a business tax forum working group
The federal government will set up a business tax reform working group to take forward the discussions from the forum. The group will bring together business leaders, tax experts and unions and will be supported by treasury to look at things like tax losses, options to fund tax losses and changing company tax rates. An initial report will be released in November and a final report by March next year.
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