A Timely Refresher on Director Penalties for Unpaid Super – is your company Superbad?

Earlier this month, the Senate Economics References Committee reported upon the impact of non-payment of the superannuation guarantee (SG).[1]  As “Superbad” companies become an increasingly hot topic and a more proactive stance by the ATO is advocated, it is a good time for directors to refresh their understanding of SG requirements and their exposure under the existing director penalty regime for non-compliance.

What must your company do?

The company must comply with its obligations to make minimum SG contributions to an employee’s nominated fund by the quarterly payment due date. If a company fails to pay the SG contributions on time, it may have to lodge a SG charge statement with the ATO and pay the SG charge to the ATO.  This includes payment of the ATO’s estimate of the SG charge, if the charge has not been assessed.

Are you personally liable for the company’s failure to pay the SG charge?

Yes. Liability can attach to directors past, present and future.

Under the director penalty regime, a director is usually personally liable for a penalty reflecting the overdue amount of the company’s SG charge liability. Former directors are still liable to pay a penalty for unpaid amounts that became due while they were a director, while a new director becomes liable in relation to amounts which are still owed by the company 30 days after their appointment.

As a director, you can avoid personal liability if:

  • because of illness or for some other good reason, you did not take part in the management of the company and it would have been unreasonable to expect you to take part;
  • you have taken all reasonable steps to ensure that the directors have caused the company to either comply with its SG charge obligations, appoint an administrator, or begin to be wound up; or
  • the penalty results from the company treating the relevant SG law as applying to a matter in a particular way that was reasonably arguable, provided the company took reasonable care in connection with applying the law to that matter.
What must you do to ensure the company’s compliance?

The purpose of the director penalty regime is to enforce the statutory duty of directors to cause the company to comply with its SG charge obligations (as well as other taxation obligations).

What does this mean in practice?

Courts have recognised that even in a relatively small organisation, it may not be right to require each director to take personal steps to ensure compliance with taxation obligations. However, it is necessary for each director to determine what the company’s obligations are and to ensure that some system is in place that will produce compliance.

It will generally be insufficient for a director to:

  • be a “sleeping director”, ie a director that does not participate in the management of the company at all;
  • plead ignorance as to the company’s non-compliance, or point to a division in roles with other directors where that director does not take in the financial management of the company;
  • blame a breakdown in the director’s relationship with the other directors; or
  • rely upon forecasts as to the company’s future ability to pay an overdue SG charge, instead of taking reasonable steps to cause an administrator to be appointed or the company to be wound up.

As a director you should therefore ensure that you are in a position to know whether or not the company is complying with its taxation obligations, as they become due. This means that you can act in a timely way and take appropriate steps if the company is non-compliant.

What do you do if your company is (or may be) Superbad?

Under the director penalty regime, time is of the essence. To avoid personal liability for unpaid SG charge or other taxation liabilities of the company, you should therefore seek professional advice immediately if:

  • you are unable to access information to ascertain whether the company is compliant;
  • the company is non-compliant and you are unsure what steps should be taken; or
  • you have received a director penalty notice from the ATO.

The information published in this paper is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.

[1] The Senate Economic References Committee, May 2017, Superbad – Wage theft and non-compliance of the Superannuation Guarantee, Senate Printing Unit, Parliament House, Canberra.