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Investors in Australia beware: Learn to check for ‘skeletons in the payroll closet’

Posted by: The ADP Team on 27 February 2017 in Compliance, Legislation, Multinational and Globalisation, Payroll, Superannuation

Investing in or acquiring an Australian business, without the right guidance, could leave you personally liable for legislative penalties of thousands of dollars.

Australian employment relations and taxation laws are some of the hardest in the world to navigate. Research commissioned by the Association of Chartered Certified Accountants ranked the Australian taxation system as the highest in ‘complexity’ and second lowest in ‘fairness’ when compared to the UK, USA, Canada, Singapore and Hong Kong.

While advisors to prospective investors consider a number of things to ascertain the financial health of a business, checking payroll processes and employer (director) obligations can be forgotten or feature low on their list of top criteria.

Here are three reasons why all investors should check for ‘skeletons in the payroll closet’, before you buy:

#1 – The Australian Taxation Office (ATO) shreds the corporate veil

Most investors believe they are protected by the ‘corporate veil’ created by the Corporations Act 2001 which states that a corporation/company is a separate legal entity to its directors. This provision is taken to mean that directors can’t be held personally accountable or tried in the case that their company is sued.

While this is mostly accurate, the introduction of the Director Penalty Notice (DPN) regime with effect from 1 July 2012, allows the ATO to penalise directors in respect of certain obligations, such as Pay As You Go Withholding (PAYGW) amounts and Superannuation Guarantee (SG) obligations. The legislation states that the directors are personally liable for any amounts that are unpaid – and this obligation may apply to a past, present or future director. In the case of a new director for example, the onus is placed on him/her to make ‘immediate enquiries’ into the SG and PAYGW liabilities of the company. After 30 days, it is deemed that the new director inherits the obligation of any unpaid and unreported amounts due prior to their date of appointment (including SG liabilities that were due from 29 June 2012 onwards).

The provision for DPNs also works in parallel with the Taxation Commissioner’s ability to estimate the PAYGW and SG Charge liability and issue an assessment based on this, where the reporting has not been completed by the company.

The penalty amount is generally equal to the outstanding liability amount and must be paid within three months of receiving the notice. Failing which, the director is held personally liable and there will be no case for remission.

The Government announced a further package of reforms on 29 August 2017 to give the ATO near real-time visibility over SG compliance by employers. It includes  measures to improve the effectiveness of the ATO’s recovery powers, including strengthening director penalty notices and use of security bonds for high-risk employers, to ensure that unpaid superannuation is better collected by the ATO and paid to employees’ super accounts. 

#2 – Fair Work Ombudsmen hunts down responsible parties

With a 63% increase in infringement and compliance notices issued last year, the Fair Work Ombudsman (FWO), Australia’s governing body on workplace laws, sent a clear message that rogue employers will be prosecuted.

Recent FWO decisions have also penalised individual business directors and payroll managers for non-compliant or unethical business practices. The ‘Hanaichi Japanese Fine Food’ decision resulted in penalties of $20,000 for the director/part-owner and $7,000 for the former internal payroll and account manager.

Fair Work Ombudsman Natalie James said, “Managerial staff need to be aware that knowingly facilitating the underpayment of employees’ minimum entitlements is serious, unlawful conduct and will not be tolerated.”

#3 – ‘The devil is in the detail’

If a business has hidden their unpaid tax or superannuation liabilities, underpayment of staff and/or the incorrect classification of staff (i.e. treating someone as a contractor when they should have been an employee), then their liabilities have been understated – making your financial reporting inaccurate.

A breach also has another painful cost: irrevocable reputational damage. The 24-hour news cycle and social media is ready to put any business that breaks the law under the spotlight. Every last detail is picked up and shared across the world within seconds.

Get help to reduce your investment risk

Speak to ADP to learn how you can leverage our payroll compliance expertise to better manage the risks associated with any new investment.

The general information provided in this blog is sourced from the Australian Taxation Office and Fair Work Ombudsman and is current at the date of this publication. ADP does not warrant the accuracy of this information and you should obtain specific professional advice for your particular circumstances.

Written by: Angela Lehmann


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TAGS: 14th Annual Private Equity & Venture Forum Australia Compliance Corporate Veil Director Penalty Regime Fair Work Human resources Investors legislation Merger & Acquisition Payroll Tax