Due to the complexity of the Superannuation Guarantee (SG) legislation, employers can easily encounter compliance issues.
Complications with applying the SG legislation
There is considerable complexity with issues such as:
- whether SG contributions must be paid for certain workers (eg the extension of the SG legislation to certain contractors and the jurisdiction reach of the SG legislation when a worker works in Australia and other countries); and
- what aspects of remuneration must SG contributions be paid in relation to.
There is not much data about the level of non-compliance with the SG legislation. However, the latest conservative estimate of the value of unpaid SG payments is at least $3.6 billion per annum. Separate research has estimated the real value of unpaid super to be closer to $6.2 billion per annum.
This issue is receiving increased attention with the recent announcement of a Senate Economics References Committee inquiry into the impact of non-payment of SG contributions. The Committee’s findings are expected to be reported in March 2017.
As part of the inquiry, legislation and penalties to encourage SG compliance and the role and performance of regulators will be examined, including in relation to the accuracy and adequacy of data collection, the effectiveness of monitoring, investigating and recovering unpaid SG contributions and the appropriateness of responses to complaints about SG non-compliance.
Director penalty regime
The director penalty regime seeks to encourage directors of companies with employees (or contractors that are deemed to be employees) to seek to ensure that their company complies with the SG legislation by imposing personal liability on directors for any unpaid SG liabilities. The regime applies to unpaid SG liabilities on and from the June 2012 quarter.
A director becomes personally liable for an unpaid SG liability of their company when the Commissioner of Taxation issues the director with a director penalty notice (DPN). The director has 22 days from the issue of the DPN to do, or cause the company to do, one of the following options before the ATO may commence proceedings against the director.
- If the SG liabilities for a quarter are reported to the ATO prior to the 29th day of the fifth month after the end of the relevant quarter, then the director has the following options:
- pay the outstanding SG liability;
- appoint an administrator to the company; or
- commence the winding up of the company.
- If the SG liabilities for a quarter are reported to the ATO on or after the 29th day of the fifth month after the end of the relevant quarter, then the only option for the director is to pay the outstanding SG liability.
Several practical consequences flow from this timing. For instance, a director’s personal liability for an outstanding SG liability of their company cannot be satisfied by the company appointing an administrator or being wound up on or after the 29th day of the fifth month after the end of the relevant quarter.
Also, if a new director is appointed, they have 30 days from their appointment to satisfy themselves that the company has no SG liability in relation to the period prior to their appointment otherwise they may become personally liable. It is important that a person considering agreeing to be a director be satisfied that the company has satisfied its SG liabilities.
Former directors remain liable for SG liabilities incurred up to the date of the director ceasing their directorship.
Potential due diligence defence
There are defences available to a director issued with a DPN. One of these is the ‘due diligence’ defence of the company having treated the SG legislation as applying in a way that could be reasonably argued was in accordance with the law, and took reasonable care in applying the legislation.
The Explanatory Memorandum for the relevant legislation states that ‘reasonable care’ in this context means:
‘making a reasonable attempt to comply with the relevant law. The effort required is one commensurate with all the company’s circumstances, including its knowledge, experience and skill.’
Under the relevant legislation a matter is ‘reasonably arguable’ if ‘it would be concluded in the circumstances, having regard to the relevant authorities, that what is argued for is about as likely to be correct as incorrect, or is more likely to be correct than incorrect’.
This defence will not be established if a matter is ‘reasonably arguable’ but the company has not taken ‘reasonable care’. In our view, ‘reasonable care’ will only be able to be established if a due diligence process has been undertaken in relation to the company’s compliance with the SG legislation. The size and scale of that due diligence process to satisfy the ‘reasonable care’ requirement will depend on the company’s circumstances such as the resources that are available to it.
For large and medium companies, we recommend that:
- the company undertake a thorough due diligence process to review SG compliance at least every 2 – 3 years with the results reported to the Board or an appropriate committee (eg the Audit and Risk Committee);
- the Board have a standing item in its agenda to obtain assurance from management about compliance with the SG legislation; and
- any new director be provided with assurance from management about compliance with the SG legislation prior to or at least within 30 days of their appointment.
Other complicating issues
Other issues that can arise when there is non-compliance with the SG legislation are potential breaches of:
- employment contracts; and
- relevant industrial instruments,
if, for example, those contracts or instruments require the company to make contributions in accordance with the SG legislation.
In addition, a director may also be in breach their duty to exercise the degree of care and diligence under section 180 of the Corporations Act 2001 (Cth).
Are your directors protected?
In our view, a director is exposed to potential personal liability unless the company has undertaken a due diligence of the company’s compliance with the SG legislation and that due diligence is commensurate with the resources that are available to the company.
We recommend that companies ensure that their directors are protected from potential personal liability for unpaid SG liability by ensuring that a due diligence process has been undertaken. When a company starts to experience cash flow problems, this issue may not be addressed and accordingly the opportunity afforded by the ‘due diligence’ defence to protect directors against personal liability may be lost.
The contents of this publication are for reference purposes only and may not be current as at the date of accessing this publication. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.
© Herbert Smith Freehills 2021