Amendments to the director penalty regime
The 2011/2012 Federal Budget handed down by the government on 10 May 2011 announced that from 1 July 2011 directors will be personally liable for any unpaid employee superannuation.
Importantly, directors will be liable for more than the mandatory 9% superannuation guarantee contribution. They will instead be liable for the superannuation guarantee charge (SGC), which is calculated as follows:
- 9% of each employee's total salary or wages (instead of just their ordinary time earnings) (shortfall amount); plus;
- interest on the shortfall amount from the beginning of the quarter in which the contribution was required to be made (ie 1 January) until the later of the lodgement of a superannuation guarantee statement outlining the shortfall amount or the 28th day of the second month after the end of the relevant quarter (ie 28 May for the quarter ending 28 March); plus
- an administration fee for each individual employee currently set at $20 per quarter.
The government has emphasised that this expansion of the existing director penalty regime is intended to improve tax compliance and counter fraudulent phoenix activity where the assets of the employer company are transferred to a new company at less than market value and the employer company wound up, preventing the Australian Taxation Office (ATO) from recovering the unpaid SGC.
Practical implications
The application of this amendment could have far reaching and potentially harsh consequences for principals that engage contractors if the ATO subsequently determines that the contractors are in fact deemed employees for superannuation law purposes. In these circumstances, directors will be personally liable for the SCG despite the genuine belief that the workers engaged were contractors and the higher fee paid to the contractor to compensate them for not receiving superannuation contributions.
Key to this issue is the difficulty in weighing the relevant factors to determine whether a worker is engaged as a contractor or deemed an employee for superannuation law purposes. No single factor will be determinative, therefore it is necessary to consider the totality of the relationship between the principal and contractor. This inevitably provides scope for opinions to vary, with potentially serious consequences for directors going forward.
What do you need to do?
We recommend that employers and principals review their superannuation arrangements for employees and contractors and consider whether any changes to their current practices need to be made before 1 July 2011.
For further information, please contact: