Personal Guarantees, what worst can happen?
Superannuation has one of the highest priorities under the Corporations Act, 2001. This is because it is an account for people to fund their retirement. Too often we have seen Directors of Companies not pay superannuation to their employees because many employees forget to check their superannuation statement to ensure that their employer has been paying the correct amount and on time.
Superannuation funds rarely remind employers to pay their superannuation past sending a letter. Superannuation funds do not report to the Australian Taxation Office (“ATO”) when a payment from an employer has not been received. Finally, Superannuation Funds do not even write to their members to let them know that an employer has not made the contribution for the quarter.
In the past, there have been many Directors that were not paying their superannuation contributions. The ATO decided to apply heavy penalties to Directors who did not pay their superannuation contributions to their employee’s superannuation funds on time. Such penalties include applying a general interest charge (currently 8%), administration charge (currently $20 per employee, per quarter) and nominal interest charge (the interest that the employee would have earned in their superannuation fund had the superannuation contribution been paid on time).
However, the ATO did not stop there, if a Director did not report to the ATO that the superannuation contributions were not able to be paid to their employees superannuation funds on or before the due date of the superannuation contribution (using the superannuation contributions guarantee form) the ATO is able to make the Director personally liable for all outstanding superannuation.
Australian Taxation Office
If the latest round of changes to Superannuation by the ATO seem severe, lets discuss the changes made to Goods and Services Taxation (“GST”), Pay as You Go Withholding taxation (“PAYG”), Luxury Car taxation (“LCT”) and Wine Equalisation taxation (“WET”).
Previously the ATO could make a Director personally liable for PAYG taxation if the statutory return (the BAS or PAYG forms) were not lodged within 3 months of the due date and the Company was placed into Liquidation.
The 3-month timing from the due date of the return still remains, however the ATO expanded the number of types of taxation that a Director can now be made personally liable for. What else has changed, is that the ATO can make an estimate of the debt owed by the Company and make the Director personally liable for the taxation by issuing a Director Penalty Notice (“DPN”). There are only 2 ways to deal with a DPN, either pay it or go Bankrupt. Depending on the type of taxation, there may be some leeway to negotiate the debt down, but such a leeway will would be minimal.
At the very least, a Director should be lodging their statutory return on time, even if they are unable to make the payment in full. This will ensure that the Director of the Company is not able to be made personally liable for these debts by the ATO.
If your Company has an account with a supplier, you should read every word of the terms and conditions BEFORE signing to obtain the credit account. If there are words like “caveat over property” “equitable interest caveat” “personal guarantee” then you are giving the creditor the right to pursue you personally should the Company be unable to pay the debt.
No matter how badly you need the product, service or cash advance or how good the deal appears to be, do not rush into signing the document without reading it first. One of the industry’s that is notorious for requiring a personal guarantee is Fintech (Financial Technology), think companies that advertise for quick loans late at night. Many of these companies not only ask for a personal guarantee but require an equitable interest caveat over any house(s) that you own to be supplied. An equitable interest caveat is the worst type of caveat as it gives the creditor the right to sell your house, without needing your consent.
Accordingly, it pays to read the fine print to ensure that you have not given a creditor the right to pursue you personally for the debt of the Company.
Here are the takeaways for Directors:
1. Lodge the Superannuation Charge Guarantee form by the due date of when superannuation is due to avoid being made personally liable for the superannuation of the Company.
2. Lodge statutory forms either on time or within 3 months of the due date to avoid being made personally liable
3. Read the fine print in all the terms and conditions when opening credit accounts with suppliers to ensure that you are not giving a personal guarantee.
If you need assistance with any of the above or if your business is struggling, book an appointment with us today to see how we can help you.