COMMUNIQUE. NEW TAX LAWS Act Now! August 2012

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1 COMMUNIQUE NEW TAX LAWS Act Now! August 2012 In recent weeks there have been changes to the Income Tax Assessment Act that may have a significant impact on you and your business entity. This Act is referred to as the Tax Laws Amendment (2012 Measures No. 2) Act The intent of the new TAX legislation is to strengthen Director s obligations for the payment of Pay as You Go ( PAYG ) withholding and superannuation guarantee levy. The legislation is also intended to minimize, deter OR eliminate the engagement of fraudulent phoenix activity by a company conducted to avoid employee entitlements and creditors. THE NEW CHANGES: On 29 June 2012 the Income Tax Assessment Act was amended to impose a personal liability on directors for Pay as You Go (Group Tax) and employee Superannuation entitlements that remain unpaid and unreported 3 months after the due date. Accordingly your Personal assets may be at risk. There is no escape from personally liability as a director once the payment and reporting fall 3 months overdue. Under the former Income Tax law it was possible for a director to avoid personal liability by causing the company to be placed into voluntary administration or liquidation within 21 days of receiving a Director Penalty Notice ( DPN ) issued by the Australian Taxation Office ( ATO ). Under the new regime once 3 months FROM THE DUE DATE OF LODGEMENT AND PAYMENT HAS EXPIRED a DPN notice may still be issued but by placing the company into Administration or Liquidation it will not negate the personal liability imposed on a director. The ATO will not commence proceedings to recover a director penalty until 21 days after a written penalty notice has been issued to that director. Page 1

2 LIABILITY OF AN ASSOCIATE OF THE DIRECTOR An associate is considered a relative, spouse, and children of the director. Automatic personal liability for a tax debt including an obligation may be placed upon an associate of the director for any unpaid PAYG credited by the company to their wages account and not remitted to the ATO. To be liable the associate must be entitled to a credit for amounts withheld by the company as PAYG. That is, when lodging your group certificate any group tax credited may be denied imposing a personal tax liability on the individual being the director or associate if the associate is employed by the company. As such not only the director, the associate can lose personal assets under the new law. The PAYG tax is not recoverable from a director or associate unless the ATO has issued a Notice to the director or associate. The ATO CANNOT issue a Notice where the relevant director has a director penalty liability due to the company failing to pay PAYG withholding. To be liable there must be a PAYG withholding credit attributable to a sum withheld by the company from payments made by the company to the associate. For new directors the associate must have been an associate of the director for the full 30 day period. Employees not an Associate of the director have no personal liability. Being an associate of the director does not create an immediate liability to the ATO. Two tests apply. First, the Commissioner must also be satisfied that due to the associate s relationship with the director or their relationship with the company, that the associate knew, or could reasonably be expected to have known, that the company had failed to pay amounts withheld to the Commissioner In addition to the knowledge or reasonable expectation of knowledge requirement, the Commissioner must also be satisfied that the associate did not: Take reasonable steps to influence the director to cause the company to notify the Commissioner about the amount withheld; Take reasonable steps to influence the director to cause the company to pay the withheld amounts to the Commissioner; Take reasonable steps to influence the director to appoint an administrator or have the company wound up; or Page 2

3 Report to the Commissioner or another relevant authority (which might include the Minister, the police, and regulatory bodies including the Australian Securities and Investments Commission (ASIC)) that the company has not paid the amount withheld to the Commissioner. In determining what reasonable steps are the Commissioner may have regard to: The length and timing of the individual s relationship with the director as an associate; The length and timing of the director being a director and taking part in the management of the company; and All other relevant circumstances. An associate is not required to be actively involved in the company s finances to be liable to pay the PAYG withholding non-compliance tax. Second, where the associate was an employee of the company, the associate is liable to pay PAYG withholding non-compliance tax if the Commissioner is satisfied that the associate was treated more favorably than other company employers. (An example would be where an associate is being paid higher than other employers doing the same task.) {Source: TAX LAWS AMENDMENT ACT (2012 MEASURES NO. 2) BILL 2012 PAY AS YOU GO WITHHOLDING MNON COMPLIANCE TAX BILL 2012 REVISED EXPLANATORY MEMORANDUM}. NEW DIRECTOR LIABILITY A New director appointed to a company will be given a 30 day grace period before they are deemed personally liable for any unremitted PAYG or Superannuation charge due and payable. It is essential before being appointed a director into an existing company you ascertain that all ATO liabilities are paid or will be paid by the due date. CONTRACTOR S LIABILITY Beware Contractors maybe subsequently deemed employees and impose you to further personal liabilities. The terms of their engagement should be immediately reviewed. OUTSTANDING LODGEMENTS We strongly recommend you get your compliance up to date for both PAYG and Superannuation entitlements before the next quarter is due i.e. all Page 3

4 outstanding PAYG and Superannuation returns must now be lodged. If you have not advised the ATO of outstanding PAYG & Super by way of lodgments then YOU as the director will become personally liable at the end of the due lodgment date. Under certain circumstances as previously advised your associates may also become personally liable. You do not have to pay the outstanding debt at the time of lodgment but as a minimum you do have to get your lodgments up to date and consider your cash flow requirements to meet the payments to the ATO. Late payment incurs financial penalties; the ATO may issue a garnishee notice, a DPN or Statutory Demand to enforce debt recovery. Act now. DEFENCES TO A DPN DPN S can now be served by post to your Registered Tax Agent and not directly to you. To avail oneself of the defences available to a Director in receipt of a DPN the director must establish to the ATO that: - It was due to Illness or the director was not involved in the management of the company and there exists a good reason for not being involved; or - The director took all reasonable steps to ensure one of the following occurred ( or where not available to the company): The debt was subsequently paid; or An administrator of the company was appointed; or The company had begun to be wound up. A director must show that good reason and reasonable steps were undertaken to receive the benefit of any of the defences. SUPERANNUATION GUARANTEE CHARGE LIBILITY A further major concern is that now that for unpaid super a director can be made personally liable as for PAYG. Personal liability for the Superannuation Guarantee charge does not attach to the associate of a director. The director penalty is either the amount assessed by the employer by lodging a superannuation guarantee statement, or amount assessed by the ATO through a default assessment, or as estimated by the ATO and a Notice of Assessment issued. An Assessment issued by the ATO is also intended to reduce phoenix activity by no longer allowing phoenix operators and other non compliant companies to escape liability once they are aware they are under review by the ATO. Again a new director is only liable after the company has not met its obligations by the due date and then only after 30 days from appointment as a director. Page 4

5 The Superannuation Guarantee charge is payable on the day the employer is required to lodge their superannuation guarantee statement for the quarter. {Source: TAX LAWS AMENDMENT ACT (2012 MEASURES NO. 2) BILL 2012 PAY AS YOU GO WITHHOLDING MNON COMPLIANCE TAX BILL 2012 REVISED EXPLANATORY MEMORANDUM}. COMPARISON OLD AND NEW LAWS New law 1. In addition to liability for PAYG withholding amounts, directors are personally liable for their company s unpaid superannuation guarantee charge. Current law 1. Directors are personally liable for their company s unpaid PAYG withholding amounts, including estimates of PAYG withholding liabilities. 2. A new director is not liable to a director penalty for company debts until 30 days after they become a director. 3. In addition to estimating unpaid PAYG withholding liabilities, the Commissioner can estimate unpaid superannuation guarantee charge. 4.In addition to the requirement that the Commissioner serve notice on a director, the 2. New directors can be liable for outstanding debts if they fail to arrange for the company to take necessary action within 14 days of becoming a director. 3. An estimate can only be made in relation to a company s PAYG withholding liabilities. 4. The Commissioner may seek to recover a director penalty by issuing a director penalty notice and may Page 5

6 Commissioner may also serve a copy of a director penalty notice on the director at his or her tax agent s address. 5. The current law continues to apply. However, where three months has lapsed after the due day for the company liability and the liability remains unpaid and unreported the director penalty is not remitted as a result of placing the company into administration or beginning to wind it up. New directors are not subject to these restricted remission options until three months after they become a director of a company, rather than three months after a debt arose. 6. In addition to these defences, a director that becomes liable to a director penalty for not causing its company to comply with its superannuation obligations is not liable to a director penalty if the company treated the Superannuation Guarantee (Administration) Act 1992 (SGA Act 1992) as applying to a matter in a way that was reasonably arguable and the company took reasonable care in applying the SGA Act 1992 to the matter. 7.Company directors and their associates who are entitled to a credit attributable to a payment made by a company that has failed to pay amounts withheld under PAYG withholding to the Commissioner, can be liable to pay PAYG withholding noncompliance tax. commence proceedings to recover 21 days after the notice was issued. 5. A director can extinguish their personal liability by causing one of three things to happen before the notice is issued or within that 21 day notice period: payment of the debt; appointment of an administrator under section 436A, 436B or 436C of the Corporations Act 2001; or beginning the winding up of the company. 6. A director has a defence in relation to a director penalty if the director had an illness that prevented him or her participating in the management of the company, or if the director took all reasonable steps to ensure compliance. 7. Company directors and their associates are entitled to PAYG withholding credits withheld by the company from a withholding payment made to them, such as salary, regardless of whether the company has paid the PAYG withholding amounts to the Commissioner. {Source: TAX LAWS AMENDMENT ACT (2012 MEASURES NO. 2) BILL 2012 PAY AS YOU GO WITHHOLDING MNON COMPLIANCE TAX BILL 2012 REVISED EXPLANATORY MEMORANDUM}. PHOENIX ACTIVITY These amendments are to act as a deterrent for a company director acting in phoenix activity or using company funds for company or other purposes that should have been used to discharge PAYG and Superannuation obligations as they fall due and payable. The ATO considers fraudulent phoenix activity to be an intentional accumulation of debts with the company being then placed into administration or liquidation to Page 6

7 avoid paying those debts and the business re emerges as another corporate entity, controlled by the same person or group but free of debts. Armstrong Shaw is here to help you. We at Armstrong Shaw are here to assist and advise you. Please do not hesitate to contact us on Reference: TAX LAWS AMENDMENT ACT (2012 MEASURES NO. 2) ACT Disclaimer: The information contained in this update is not advice and should not be relied upon as legal advice. We at Armstrong & Shaw are available to meet with you to discuss your clients personal and business affairs on an initial obligation free consultation basis. Contact: Dennis Griffiths on , or By Page 7

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